Micro FINAL Flashcards
Demand Elasticities Measure
Ed > 1 - Elastic
Ed = 1 - Unit Elastic
Ed < 1 - Inelastic
Ed = infinity - Perfectly Elastic
Ed = 0 - Perfectly Inelastic
If the Price is Elastic increasing price will lead to …
Decreasing Revenue
If the Price is Unit Elastic increasing price will lead to …
No change
If the Price is Ineastic increasing price will lead to …
Increasing Revenue
Determinants of the Price Elasticity of Demand
Closeness of substitutes
Budget share spent on the good
Available time to adjust
If Cross-Price Elasticity of Demand is negative then …
The goods are complement
If Cross-Price Elasticity of Demand is zero then …
The goods are independent
If Cross-Price Elasticity of Demand is positive then …
The goods are substitutes
If income elasticity of demand is less than 0, then …
G&S is inferior
If income elasticity of demand is less than 1, but greater than 0, then …
G&S is normal and necessity
If income elasticity of demand is greater than 1, then …
G&S is normal and luxury
Budget constraint
The consumption bundles (i.e., a particular combination of goods) a consumer can afford
Marginal rate of substitution
The rate at which the consumer is willing to substitute one good for another
Economies of scale
occur when long-run average total cost falls as the quantity of output increases
Diseconomies of scale
occur when long-run average total cost rises as the quantity of output increases
Shutdown point
A short-run decision not to produce anything because of market conditions.
(If shutdown in the short run, it must still pay fixed costs.)
Shutdown if P < AVC
Exit point
A long-run decision to leave the market
(If exit in the long run, there are zero costs.)
Exit if P < ATC
The LR market supply curve is horizontal if
all firms have identical costs, and
costs do not change as other firms enter or exit the market.
Perfect competition
P = MR
Competitive equilibrium
P = MC
Three sources of barriers to entry
Monopoly resources: A single firm owns a key resource
Government regulation: The government gives a single firm the exclusive right to produce a good
The production process: A single firm can produce a good at a lower cost than a larger number of producers
Monopoly equilibrium
P > MR = MC
Public Policy Toward Monopolies
Increasing competition with competition laws
Ban some anticompetitive practices and break up monopolies.
Regulations
Government agencies set the monopolist’s price.
Public ownership
Problem: Public ownership is usually less efficient since there is no profit motive to minimize costs.
Doing nothing
The foregoing policies all have drawbacks, so the best policy may be no policy.
Characteristics of Four Market Structures
Perfect competition (Corn, Apples)
Monopolistic competition (Books, Music) /Many competing firms
Products are similar but slightly differentiated
No barriers to entry or exit
Zero economic profits in the long run/
Oligopoly (Oil, Cement) /Market where there are only a few firms competing
Products can be either homogeneous or differentiated
Significant barriers to entry and exit
Each firm’s decisions are dependent upon other firms’ actions
Positive economic profits in the long run
/
Monopoly (Drugs)
Differentiated products
Goods that are similar but not identical
Homogeneous products
Goods that are identical, making them perfect substitutes
Oligopolies’ problem
Like a monopolist, has significant barriers to entry, resulting in long-run economic profits
High degree of interdependence between the few firms that occupy the market
Collusion
An agreement among firms in a market about quantities to produce or prices to charge.
Cartel
a group of firms acting in unison.
Both firms would be better off if both stick to the cartel agreement.
But each firm has incentive to renege on the agreement.
It is difficult for oligopoly firms to form cartels and honor their agreements.
Nash equilibrium
a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen
Moral hazard
the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages
Adverse selection
is a term used in economics and insurance to describe a market process in which buyers or sellers of a product or service are able to use their private knowledge of the risk factors involved in the transaction to maximize their outcomes, at the expense of the other parties to the transaction.
