II.D.3.a-e Exam Flashcards
what are the four market models?
- perfect competition
- monopoly
- monopolistic competition
- oligopoly
Characteristics of a perfect competition market structure (5)
- many small firms
- identical products
- easy for firms to enter and exit the industry
- seller has no need to advertise
- firms are “price takers”
the demand curve for a perfectly competitive market structure is….
perfectly elastic (a horizontal straight line)
for perfect competition what is MRDARP
this is the demand curve:
- MR= marginal revenue
- D= demand
- AR=Average revenue
- P= price
what is the profit maximizing rule of a perfect comp market structure?
MR=MC
why do firms still produce even if they are experiencing an economic loss in short run?
- their profit covers their their variable costs and only a portion of their fixed costs
- this is better than shutting down and taking a loss on ALL of their fixed costs
if the MRDARP curve is below ATC and AVC what does this mean?
there is a loss and the firm will shut down
if the MRDARP curve is below ATC but above AVC then what does this mean?
the firm is having a loss but will continue to function
if the MRDARP curve is above the ATC curve then what does this mean?
the firm has a profit
does the MR=MC rule apply to all markets?
yes and only if the price is above AVC
when the MRDARP curve = min of ATC what does this mean?
they are breaking even
MC above the AVC curve is….
the supply curve
when MC increase, supply…
when MC decreases, supply…
- decreases
2. increases
in the long run how do firms act? (4)
- firms will enter if there is a profit
- firms will leave if there is loss
- ALL firms break even, they make NO economic profit/ normal profit
- in long run equilibrium a perfectly competitive firm is EXTREMELY effiicient
if MRDARP is above the ATC curve and you want it to break even (or go to long run equilibrium) what do you do?
you increase the supply curve( which moves to the right) which then lowers the price that the firm takes
what do you do if the MRDARP curve is below the ATC curve and you want it to be in long run equilibrium?
you decrease the supply which shifts the curve to the left and makes the price that the firm takes higher.
when ATC is below the MRDARP curve do firms want to come in or leave the market?
they want to come in because there is a profit to be made
when ATC is above the MRDARP curve do firms want to come in or leave the market?
they want to leave the market because they are having a loss
efficiency
the optimal use of societies scarce resources
true or false:
perfect competition forces producers to use limited resources to their fullest potential
true
what are the two kinds of efficiency?
- productive efficiency
2. allocative efficiency
what is productive efficiency?
*products are produced at the lowest cost
what is allocative efficiency
-combinations depend on the wants of society
on the graph how do you find productive efficiency
when Price=Minimum ATC
on the graph how do you find allocative efficiency?
where Price = MC
what is underallocation of resources
not enough goods or services being produced
-society wants more
what is overallocation of resources?
too much goods or services are being produced
-society wants less
what are the five characteristics of monopoly?
- single seller
- unique good with no close substitutes
- price maker
- high barriers to enter market
- some “nonprice” competition (despite having no close competitors, monopolies still advertise their products in an effort to increase demand
what are the four origins of monopolies?
- geography is a the barrier to entry (location or control of resources limits competition and lead to one supplier)
- the govt is the barrier to entry (govt allows monopoly for public benefits or to stimulate innovation, govt issues patents to protect inventors)
- technology or common use is the barrier to entry (patents and widespread availability of certain products lead to only one major firm controlling a market)
- Mass production and low costs are barriers to entry (economies of scale make it impractical to have small firms)
natural monopoly
it is NATURAL for only one firm to produce because they can produce at the lowest cost
what is the differences between perfect competition and monopolies?
- MARGINAL REVENUE DOESN’T EQUAL PRICE “MR is separate from DARP”
- downward sloping demand curve
- to sell more a firm must lower its price
which one MR is greater than P MR is less than P MR is equal to P in monopoly
MR is less than Price
in what region does a monopoly operate in? unite elastic, elastic, or inelastic?
elastic
in the inelastic part of the demand curve for the monopoly what does this mean?
Total revenue is now decreasing
how do you find output quantity and price on monopoly?
MR=MC point and drag down to find quantity.
For price, find MR = MC point and drag it up to Price (DARP) curve to find price
what are the four reasons monopolies are not efficient?
- charge a higher price
- don’t produce enough (not allocatively efficient)
- produce at higher costs (not productively efficienty)
- Have little incentive to innovate
what are the three forms of price discrimination?
- charge each customer max willingness to pay
- charge one price for first unit and a lower price for subsequent units
- charge different customers different prices
what is the effect on consumer surplus if you charge a customer the maximum amount they are willing to pay?
the consumer surplus would be zero
what will happen if a firm is regulated by the govt to produce at a loss?
the govt will provide a subsidy to the firm to keep them producing
what does a per unit tax affect?
the marginal cost curve
what does a lump sum tax affect?
the ATC curve
