Final exam Flashcards
Characteristics of oligopoly
- few large firms
- differentiated or identical products
- significant entry barriers
- firms mutually interdependent
- significant control over P
- economies of scale
examples of oligopoly
automobile companies, airlines, smartphones, lawnmowers, steel, aluminum
Kinked demand curve
if p is increased, competitors will not follow suit (so will be on D2)- rivals DO NOT react
if p is lowered, competitors will also lower their P (so will be on D1) - rivals REACT
Oligopoly equilibrium
MR = MC
- MR is discontinuous
- get P only from D curve - p and output are rigid
oligopoly market
- price wars (airlines)
- collusion = illegal
- price leadership (leader / follower model)
game theory
one firm is dependent on another firm's behavior in making decisions - mutually independent - duopoly - dominant strategy - nash equilibrium Box thing
dominant strategy
the best strategy irrespective of the action of your rival
ex: spotify charge lower P of $9.99 no matter what apple does
price matrix
- price guarantee
- coupons
- price itself will be higher
monopoly characteristics
- single firm
- unique product, no close substitutes
- e < 1, steep D curve
- entry barriers (very difficult - patents, trademarks, etc.)
reasons for monopoly
- legal and government
- geographical
- control over key resources
- network externalities
- natural monopoly
monopoly equilibrium
MR= MC when P > MC: 1. resources not allocated efficiently 2. consumer exploitation 3. monopolist continues to earn supernormal profits even in long run due to entry barriers
long run profits for a monopoly
because of barriers to entry, no new firms enter, so there is NO distinction between short-run and long-run for monopoly (nothing will change in long-run)
PC vs. Monopoly
PC:
- graph
- output is higher and P is lower
- Under PC, P = MC
- no consumer exploitation; resources efficient - in long run, competitive firm gets normal profits only (due to free entry and free exit)
Monopoly:
- Graph
- output is smaller and P is higher
- P > MC
- possible exploitation, resource inefficiency - monopolist continues to get supernormal profits even in long-run due to entry barriers
natural monopoly
situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can 2 or more firms
- public utilities - essential services
SDG & E
- AC continues to fall for a considerable range of output
natural monopoly equilibrium
MR = MC
Demand for labor
different from the demand for the final goods and services because it is a derived demand (depends on d for the good the factor produces)
Marginal revenue product of labor (MRP)
change in a firm’s revenue as a result of hiring one more worker
multiply additional output produced by the product price
- curve is same as D curve for labor
Equilibrium in labor market
W = MRP
profit maximizing point
Marginal Product (MP)
addition made to total output by hiring one more worker
- a physical quantity
Backward bending supply of labor
first a normal S curve - as W increases S increases (substitution effect)
then as W increases S decreases (income effect)
Substitution effect
an increase in wage raises the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure
Income effect
because leisure is a normal good, a wage increase will cause a worker to devote less time to working and more time to leisure
absolute advantage
the ability to produce more of a good or service when using the same amount of resources (quantity)
comparative advantage
ability to produce more of a good or service at a lower opportunity cost than competitors (cost)z
opportunity cost
the highest valued alternative that must be given up to engage in an activity
tariffs
a tax on imports
effects of tariffs
- D for imported goods decreases with an increase in P
- Domestic companies compete better (winner)
- Hire more workers (employment increases)
- Govt. collects tariffs (winner
- Infant industry argument
Quotas
limit on the physical quantity of imports
- smaller effect than tariff
tariffs vs. quotas
tariffs:
1. tax on imports (govt gets revenue)
2. increase in P of imported good
3. work INDIRECTLY through D, S, and markets
4. Import reduction NOT predictable (depends on elasticity of D and S)
quotas:
1. limit the physical quantity (no revenue)
2. May not increase the P
3. Work indirectly (no dependence on D, S, or markets)
4. Predictable decline in imports
infant industry
a justification to use tariffs, industry is:
- early stage
- small scale
- AC is higher
Give them a headstart: in 4- 5 yrs will expand Q and lower AC (become more efficient)
World Trade Organization (WTO)
international organization that oversees international trade agreement
Globalization
process of countries becoming more open to foreign trade and investment
Opposition to WTO
- anti globalization
- “old fashioned” protectionism: use of trade barriers to shield domestic firms from foreign competition
- based on saving jobs, protecting high wages, protecting infant industries, protecting national security
