LM 1: The Firm & Market Structures Flashcards
In a perfectly competitive market, what do the Marginal Revenue (Demand Curve) and the Total Revenue (TR) look like?
the marginal curve is flat = price for each unit produced
total return curve increases a a proportionate rate as quantity increases
In an imperfectly competitive firm, what does the demand curve vs the marginal revenue, and the total return look like?
demand curve slopes down as quantity increases because they have pricing power.
total return takes the shape of an arch because the benefits of selling at a lower price disappear beyond a certain point.
What shape does short-term marginal cost (SMC), average variable cost (AVC), and average total cost (ATC) take and why?
start out high and then fall before raising again as output increases
In a perfectly competitive market, what determines price?
price = average renenue = marginal revenue
In an imperfect competitive market (monopoly), what determines price and what does the marginal revenue look like?
price = average revenue
marginal revenue = downward slope, starts at same point as demand curve but decreases faster.
Where in a perfect or imperfect competition, how does a firm maximize profits?
by setting production quantity (Q) at the point where marginal revenue equals short term marginal cost (MR = SMC)
Where on a graph is the break-even point and the shutdown point?
breakeven point: SMC crosses ATC (total revenue = total cost)
shutdown point: SMC crosses AVC
If total revenue(TR) exceeds total cost (TC) what should a firm do in the short run decision and long term decision?
TR > TC
short run: stay in market
long run: stay in market
If total cost (TC) exceeds total return (TR) which exceeds the total variable cost (TVC) what should a firm do in the short run decision and long term decision?
TC> TR> TVC
short - run: stay in market
long- run: exit market
If total variable cost exceeds total revenue what should a firm do in the short-term and long term?
TVC > TR
short-run: shut down production
long run: exit market
What is the short-run average total cost curve (SRATC) composed of?
curve defines the per unit cost in the short run
What is the long-run average total cost (LRATC) composed of?
curve tangent to different SRATC periods.
What is economies of scale vs diseconomies of scale?
economies of scale: the cost advantages a company gains with the increase in production. occurs because production costs can be spread over a large number of goods
diseconomies of scale: when a company or business grows so large that the costs per unit increase
What is the minimum efficient scale (MES), what does it mean, and what must a firm do when it reaches the minimum efficient scale (MES)?
low point on the LRATC where a company doesn’t benefit from economies of scale or doesn’t get hurt from diseconomies of scale.
firm must operate to minimize its cost per unit.
What does accounting profit consist of?
economic profit and normal profit.
What are 4 market structures economists classify? PMOM
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
What is a market?
group of buyers and sellers that agree on a price to exchange goods and services
What are the 5 factors that determine market structure? NDBPN
- number of sellers
- degree of product differentiation
- barriers to entry
- pricing power of firm
- non-price competition
How many sellers are there in the 4 market structures?
- perfect competition = many
- monopolistic competition = many
- oligopoly =few
- monopoly = one
What is the degree of product differentiation in the 4 market structures?
- perfect competition = the same
- monopolistic competition = differentiated
- oligopoly = the same
- monopoly = unique
What is the barriers to entry in the 4 market structures?
- perfect competition = very low
- monopolistic competition = low
- oligopoly = high
- monopoly = very high
What is the pricing power of firm in the 4 market structures?
- perfect competition = none
- monopolistic competition = some
- oligopoly = some or considerable
- monopoly = considerable
What is the non-price competition of the 4 market structures?
- perfect competition = none
- monopolistic competition = advertising & product differentiation
- oligopoly = advertising & product differentiation
- monopoly = advertising
What is non-price competition?
form of competition that requires firms to focus on product differentiation instead of pricing strategies among competitors
What is perfect competition?
perfect competition have homogeneous (i.e., identical) products with no producer large enough to influence the price
What is a monopolistic competition?
type of market also has a large number of firms, but the products are differentiated.
What is oligopoly?
market structure has only a few firms supplying the market.
What is a monopoly?
single seller and no substitutes for the product (eg. electricity)
In a monopolistic competitive environment how many units should a company produce?
produce units where Marginal Cost = Marginal Revenue
What is the Herfindahl-Hirschman index (HHI) approach to measuring market power?
HHI is the sum of the squared market shares of the N largest firms
HHI = MV ^1 * MV^2 * MV^3
In an oligopoly when would a firm collude with another firm?
If one firm has a significantly larger market share than the other.
What is the difference between the Stackelberg model and the Nash model or Cournot model?
Stackelberg model: firms make decisions sequentially, leader firm makes its decision then follower firm makes its decision after observing the leader firm’s decision.
The Cournot and Nash models assume that firms make decisions simultaneously. The “follower” must determine its output level without first observing the dominant firm’s decision.
What is the concentration ratio approach to measuring market power and what does 0 and 100 mean on the spectrum?
sum of market shares of the N largest firms
always be between 0 and 100.
0 means perfect competition
100 means monopoly
What is price collusion?
when firms work together to set prices
What are 3 pricing strategies used for oligopoly markets? PCG
- Pricing Interdependence
- Cournot Assumption
- Game Theory/Nash Equilibrium
What is Pricing Interdependence?
bid wars
What is cournot competition?
choose a quantity to produce independently and simultaneously
What is nash equilibrium/ game theory?
think about opponents moves before you move position
What is the stackelberg model?
Stackelberg model assumes that firms make decisions sequentially. The leader firm makes its decision first. Then the follower firm makes its decision after observing the leader firm’s decision.
What is nationalization ?
process of taking privately-controlled companies, industries, or assets and putting them under the control of the government
