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ECON 1010 2.0 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Perfect competition

A

Market structure is characterized by a very large number of firms producing a standardized product. New firms can enter the industry very easily.

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2
Q

Monopoly

A

Market structure one firm is the sole seller of a product or service. Entry of additional firms is blocked, one firm constitutes the entire industry. The monopolist produces a unique product, so product differentiation is not an issue.

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3
Q

Monopolistic competition

A

Relatively large number of sellers produce differentiated products. Non price competition (focuses rather on attributes like design and quality). Entry to monopolistic competitive industries is quite easy.

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4
Q

Oligopoly

A

Only a few sellers of a standardized or differentiated product; each firm is affected by the decisions of its rivals and must take those decisions into account when determining its own price and output.

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5
Q

Characteristics of Perfectly Competitive Markets

A
  • very large numbers
  • standardized product
  • price-takers (can’t change the market price, but can only adjust to it).
  • easy entry and exit
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6
Q

Demand curve for perfectly competitive markets

A

Perfectly elastic since the firm can sell as much output as it wants at market price.

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7
Q

TR=

A

P x Q

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8
Q

AR=

A

TR/Q

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9
Q

MR=

A

Change in TR/change in output

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10
Q

TR, AR, MR relationship in perfect competition

A
  • price and AR are the same thing

- in perfect competition, MR and P are equal

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11
Q

Demand for perfectly competitive INDIVIDUAL firm

A

Perfectly price elastic demand (firm is a price taker, not a price maker), firm cannot increase price, firm can sell all it produces at market price

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12
Q

Demand for a perfectly competitive INDUSTRY

A

Can only adjust its own output. Firm cannot adjust its selling price.

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13
Q

TR - TC rule

A
  • profit is maximized where the vertical diatance between TR and TC is greatest.
  • profit= TR-TC
  • firm will choose the output level where the “belly” is largest (max economic profit).
  • break even points are where TR=TC
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14
Q

MR-MC rule

A
  • short run profit maximization rule: short run profit maximization occurs where MR (=P)= MC.
  • firm should produce last unit for which MR > MC.
  • firm shuts down if P < AVC
  • profit/loss calculation: profit= Q (MR- MC) x ATC
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15
Q

MC curve in perfect competition

A

-firm’s short-run supply curve is the portion of its MC curve above minimum AVC

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16
Q

Firm’s supply in perfect competition

A

Supply curve shifts:

  • a wage increase shifts the supply curve upward and to the left (decreasing supply).
  • technological progress would shift the supply curve downward to the right (increasing supply).
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17
Q

Profit Maximization in the short-run

A
  • TR-TC Approach
  • MR-MC Approach
  • loss-minimizing case MR > MC
  • shutdown case P
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18
Q

Profit Maximization in the long-run

A

Easy entry and exit
-only long run adjustment that we consider
Identical costs
-all firms in the industry have identical costs
Constant-cost industry
-entry and exit do not affect resource prices

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19
Q

Long-run dynamics: ENTRY

A

entry eliminates profits

  • firms enter
  • supply increases
  • price falls
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20
Q

Long-run dynamics: EXIT

A

Exit eliminates losses

  • firms exit
  • supply decreases
  • price rises
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21
Q

Economic profit in the long run

A

Is equal to zero

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22
Q

Constant-cost Industry Definition

A

An industry in which the entry of new firms has no effect on resource prices and thus no effect on profuction costs

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23
Q

Constant cost industry

A
  • entry/exit does not affect long run ATC
  • constant resource price
  • special case
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24
Q

Increasing cost industry definition

A

An industry in which the entry of new firms raises resource prices and thus increases production costs

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25
Q

Increasing cost industry

A
  • most industries
  • long-run ATC increases with expansion
  • specialized resources
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26
Q

Decreasing cost industry definition

A

An industry in which the entry of firms lowers resource prices and thus decreases production costs

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27
Q

Decreasing cost industry

A
  • personal computer industry
  • increasing cost if output contracts
  • firm experiences lower costs as the industry expands
28
Q

Perfectly competitive marker and efficiency

A

Long run equilibrium

  • triple equality occurs P (and MR) = MC = min ATC.
  • each firm produces output level Q associated with the triple equality.
  • earn only normal profit by producing with the MR (=P) =MC rule in the long run.
  • pure competition leads to the most efficient use of resources.
  • generates both productive and allocative efficiency
29
Q

Productive efficiency

A

Producing where P=min ATC

  • goods must be produced in the least costly way.
  • firms produce at the min ATC of production and charge at a price that’s consistent with that cost.
  • if a firm does not do this, then it will not survive.
30
Q

Allocative Efficiency

A

Producing where P=MC

  • assuring that societies scarce resources are directed toward producing the goods and services that people most want to consume.
  • occurs when it is impossible to produce any net gains for society by altering the combination of goods and resources they’re produced from society’s limited supply of resources.
31
Q

Consumer surplus

A

Difference between what a consumer is willing to pay for a good and what the consumer actually pays.
-extra benefit from paying less than the maximum price.

32
Q

Producer surplus

A

Difference between the actual price a producer receives and the minimum price they would accept.
-extra benefit from receiving a higher price

33
Q

Characteristics of Monopoly

A
  • single seller
  • no close substitutes
  • price-maker (controls quantity supplied and has a large control over price)
  • blocked entry (barriers keep competitors from entering the industry)
  • nonprice competition (product either standardized or differentiated)
34
Q

How do monopolies form?

A

Barriers to entry and scarce resources

35
Q

Monopolist demand

A
  • monopolist is the industry
  • demand curve= market demand curve (downsloping demand curve)
  • MR < P
  • monopolist is the price maker
  • monopolist sets price in the elastic region of demand curve
36
Q

Output and Price Determination (Monopoly)

A

Cost data
-assume competitive factor markets
MR=MC Rule
-will produce output until the point where MR=MC
No monopoly supply curve
-possible for different demand conditions to bring different prices at the same output. So monopolist has no supply curve

37
Q

Misconceptions of Monopoly Pricing

A

Don’t charge the highest price
-monopolist seeks to maximize total profit, not maximum price.
Total profit
-monopolist seeks to maximize total profit, not maximum unit profit.
Possibility of losses

38
Q

Monopoly and Efficiency

A

Monopoly yields neither productive nor allocative efficiency.

  • Monopoly price exceeds minimum ATC
  • Monopoly under produces
39
Q

Deadweight loss

A

Refers to the net loss of consumer surplus and producer surplus. At Q, MB > MC showing that the monopolist it not producing as much as the consumers would like. Allocative Efficiency is not achieved.

40
Q

X-Inefficiency

A

Occurs when a firm produces output at a higher cost than is necessary to produce it.

41
Q

Economic Effects of Monopoly

A
  • income transfer

- cost complications

42
Q

Rent-seeking behavior

A

Actively designed to transfer income or wealth to a particular firm or resource supplier at someone else’s, or even society’s expense. Monopolist can obtain an economic profit even in the long-run

43
Q

Assessment and Policy Options

A

Three policy options:

  1. Charges under Canada’s anti-combines laws
  2. Regulate prices and operations of natural monopolies
  3. Ignore monopolies which are unsustainable over the long term.
44
Q

Price Discrimination

A
  • charging maximum price customer will pay
  • charging customer one price for 1st set purchased and lower price for subsequent units
  • charging some customers one price, others another
45
Q

Necessary conditions for price discrimination

A
  • Monopoly power
  • market segregation
  • no resale
46
Q

Elasticity and Price Discrimination

A

Charge high price to groups with inelastic demand.

Charge low price to those with elastic demand.

47
Q

Regulated monopoly

A
  • socially optimal price where P=MC

- fair-return price where P=ATC

48
Q

Dilemma of Regulation

A 
Setting price at P=MC
-firm earns losses
Setting price at P=ATC
-underallocation of resources
Regulation can improve outcomes
49
Q

Monopoly and Deadweight Loss

A
  • net loss of consumer and producer surplus is the deadweight loss
  • Monopolist also loses producer surplus, but gains producer surplus at the expense of consumer surplus
  • consumers lose consumer surplus.
50
Q

Characteristics of Monopolistic Competition

A
  1. Relatively large number of sellers
    - small market shares
    - no collusion
    - independent action
  2. Differentiated products
    - service/location
    - brand name and packaging
    - some control over price
  3. Easy entry and exit
    - firms are small
  4. Advertising
    - nonprice competition
51
Q

Herfindahl index

A

Sum of the squared market shares

52
Q

Price and Output in Monopolistic Competition

A
  1. Demand is highly elastic
  2. The short run: profit or loss
    - produce where MR=MC
  3. The long run: only a normal profit
    - entry and exit
  4. Inefficient
  5. Product variety
    - much less boring market for consumers
53
Q

Monopolistic competition and efficiency

A

Inefficient

54
Q

Productive inefficiency

A

P > min ATC

55
Q

Allocative Inefficiency

A

P > MC

56
Q

Excess capacity

A

Gap between min ATC and output.

57
Q

Main characteristics of an Oligopoly

A
  • a few large producers
  • homogeneous or differentiated products
  • control over price (mutual interdependence and strategic behavior)
  • entry barriers
  • mergers (combining of two or more competing firms)
58
Q

One time game

A

Firms select their optimal strategy in a single time period without regard to possible interactions in subsequent time periods

59
Q

Dominant strategy

A

An option that is better than any alternative option regardless of what the other firm does

60
Q

Equilibrium

A

Outcome neither rival wants to deviate

61
Q

Repeated game

A

Game that recurs more than once. Optimal strategy may be to cooperate and refrain from competing as hard as possible

62
Q

First mover advantage

A

Final outcome may depend upon which firm moves first

63
Q

Credible threat

A

A statement of coercion that is believable by the other firm

64
Q

Empty threat

A

A statement of coercion that is not believable by the threatened firm

65
Q

Collusion

A

Agreement with rivals

66
Q

Price leadership

A

Practice evolves whereby the dominant firm initiates a price change and all the other firms follow.

67
Q

Oligopoly and efficiency

A

Oligopolies are inefficient.

Productive and allocatively inefficient

ECON 1010 2.0 (4 decks)

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