Intro & Part 1 Flashcards
Why does competition lead to a decrease in the number of rims in the long run?
Because of Economies of scale
What is the neoclassical theory of the firm regarding competition?
It is based on a static conception of competition
For Schumpeter by what is competition driven?
By innovation
Give details about monopoly status according to the dynamic view of competition
It is a temporary phenomenon that is not capable os sustaining a stable long-run equilibrium
What does SCP mean?
Structure Conduct Performance
What does Industrial Organization do?
Develops theories to explain the behaviour and performance of firms and the industries to which they belong
What does the SCP paradigm do?
The structure of a market influences the conduct of the firms operating in the market, which in turn influences the performance of those firms.
What is IO concerned with?
1\ Size structure of firms
2\ causes of size structure
3\ Effects of concentration on competition
4\ Effects of competition on prices
What are the STRUCTURE characteristics?
1\ Number and size distribution of buyers and sellers
2\ entry and exit conditions
3\ product differentiation
4\ Vertical integration and diversification
What are the CONDUCT characteristics?
1\ Business objectives 2\ Pricing policies 3\ Product design 4\ R&D 5\ Collusion 6\ Merger
What is an horizontal merger?
Merger between firms producing the same or similar products and does impact the seller concentration
What is a vertical merger?
Merger between firms at successive stages of production process and does affect the degree of vertical integration
What is a conglomerate merger?
Merger between firms producing different products and does affect the degree of diversification
What are the characteristics of PERFORMANCE?
1\ Profitability 2\ Growth 3\ Quality of products and services 4\ Technological progress 5\ Productive and allocative efficiency --> maximum technologically feasible output from a given combination of inputs
What are the five forces of Porter’s model?
1\ Buyers 2\ Suppliers 3\ Potential rivals 4\ Substitutes 5\ Competitors
Of what type is Porter’s approach?
Essentially static
How is competitive advantage measured?
By the value a firm is able to create by excess of its costs
What are the 2 types of activities of a firm specific to the value chain concept of Porter?
1\ Primary activities
2\ Support activities
What do generic strategy include?
1\ Cost leadership
2\ Differentiation
3\ Focus
What is the law of diminishing returns?
It is the law of diminishing marginal productivity
What does happen when Marginal Product of Labour > Average Product of Labour ?
APL increases
What does happen when APL = MPL ?
APL is at its maximum
What is the marginal cost?
It is the additional cost a firm incurs in order to produce one additional unit of output
What does happen when APL rises?
AVC falls
What does happen when the SRMC < AVC ?
AVC decreases
What does happen when SRMC = AVC ?
AVC is at its minimum
What are increasing returns to scale?
When returns increase more than proportionately than the increase of inputs
What is an isoquant on LRAC?
A curve where each point represents a combination of labour and capital giving the same output
What is an isocost on LRAC?
Line giving combination of labour and capital costing me the same amount
Give 3 types of economies of scale
1\ Large-scale production
2\ Indivisibilities
3\ Learning economies
Where do diseconomies of scale come from?
1\ Strained communications
2\ Long chain of commands
3\ Low morale
3\ Poor industrial relations
What are economies of scope?
Cost savings arising when a firm produces two or more outputs using the same set of resources
What is the Minimum Efficient Scale?
The output level beyond which the firm can make no further savings in LRAC through further expansion.
The MES is achieved when all economies of scale are exhausted
What is the shape of the Total Revenue function related to quantity demanded in a monopoly situation?
Gauss
What happens if the Price Elasticity of Demande is > 1 ?
TR increases as Price falls, the demande function is therefore called price elastic
What is the cross price elasticity of demand?
The change in demand of a product to a change in price of another product
What does it mean if CED > 0 ?
Products are substitutes
What does it mean if CED < 0 ?
Products are complements
What is the price elasticity of supply?
The sensitivity of quantity supplied to market price
What are the most important characteristics of market structure?
1\ # of firms
2\ extent of barriers to entry
3\ degree of product differentiation
4\ Quality of information
Of what type are the products in the perfect competition?
Identical
How are the buyers and the sellers in perfect competition?
Price takers
What is the Lerner index?
Degree to which the price exceeds marginal costs. It is the reciprocal of the PED. It provides a measure of the market power of a firm
What is allocative efficiency?
All agents are fully allocated and one agent can’t be better off without making another agent worse off
What does economically efficient mean?
Combination of factor inputs enabling to produce at the lowest possible cost
What is the consumer surplus?
The sum over all consumers of the difference between the maximum amount each consumer would be prepared to pay and the price each consumer actually does pay
What is the producer surplus?
The total reward producers receive beyond the reward they require to cover their costs of production, including their normal profit.
In a monopoly situation, it is the monopoly abnormal profit
