Firms Flashcards
Goal of firms
to maximize revenue and minimize costs
Inputs
what is needed to produce something: labor, capital, land
Production Function Formula
Quantity of outputs = F(inputs/costs)
F= production function
Marginal cost
costs in wages
marginal revenue
revenue from product
marginal productivity
amount of outputs produced
Maximize profit
When Marginal costs are equal to Marginal revenues
Perfect competition
market of buyers and sellers, firms can enter and exit freely, trade same product, consumer have full information
Goal is to maximize profit by…
Marginal costs=Mariginal revenue
When do firms exit during perfect competition?
when their costs are more than their revenues
when do firms enter during perfect competition?
when they think their revenue will be higher than their costs
benefits of perfect competition
prices are low, quantities are high and profit is close to zero
why does profit being close to zero important for perfect competition?
When firms make positive profit they try to disturb the first two benefits of perfect competition. manipulate the market to gain more profit through bad behavior such as misinformation.
Monopolistic Competition
Mix of perfect competition with one monopoly element
features of monopolistic competition?
firms can enter and exit market freely, lots of buyers and sellers, profits close to zero, slight differentiation and firms have some control over prices
Why can firms change prices in monopolistic competition?
People do not have access to all information. people may be thinking there is a difference in quality
Benefits of Monopolistic competition?
consumers have choice between firms, firms can enter and exit freely, profit is close to zero
Negatives of Monopolistic competition?
Excess capacity, markup costs (pay for brand name), firms create illusion of choice by developing different brands
Oligopoly features
few firms, products slightly vary, block new firms from entering, lack of price competition
How do firms create the illusion of choice?
By creating different brands that they still own.
strategies of firm in oligopoly
set and react to prices, outputs, advertising and investments
Game strategies
dominant, nash, maximim, random and tit for tat
dominant strategy
you do your absolute best at all times
nash strategy
you do your best based on what the other company is doing
maximin strategy
avoid the worse case senario
random strategy
decide randomly at the last second
tit for tat strategy
copy/mirror behavior of the other firm
Outcomes of oligopolies
few firms, block other firms from joining, illusion of choice, set costs and prices, firms are gaining profits
Monopolies
One firm has control of market
Monopoly features
block others from joining through resource barriers or legal barriers and create the illusion of choice. Ex: Coned
How to maximize profit?
marginal costs and marginal revenues should be equal
why are monopolies inefficient?
low quantities, high prices, deadweight loss and high profits
solution for monopolies
laws to prevent monopolies and allow competition
