Microecon chapter 11 Flashcards
minimum efficient scale relative to the size of the total market
minimum efficient scale relative to the size of the total market
The larger the minimum efficient scale relative to market size, the smaller is the number of producers in the industry.
What is the way to determine to which structure the market should be referred to if it is not evident logically
to examine the percentage of sales in the market that is attributable to a small number of firms.
The larger the share, the more concentrated the market power.
What is the N-firm concentration ratio
the sales share of the largest N firms in that sector of the economy.
What is monopolistic competition
a large number of quite small producers or suppliers, each of whom may have a slightly differentiated product.
The competition element of this name signifies that there are many participants, while the monopoly component signifies that each supplier faces a downward-sloping demand
The competition part of the name also indicates that there is free entry and exit
For example, fair trade coffee and normal one
In monopolistic competetion when normal profits will occur
in a long-run equilibrium. Economic profits will be competed away by entry, just as losses will erode due to exit.
In monopolistic comptetion can the firm influence the price
As a general rule then, each firm can influence its market share to some extent by changing its price. Its demand curve is not horizontal because different firms’ products are only limited substitutes. A lower price level may draw some new customers away from competitors, but convenience or taste will prevent most patrons from deserting their local businesses.
In concrete terms: A pasta special at the local Italian restaurant that reduces the price below the corresponding price at the competing local Thai restaurant will indeed draw clients away from the latter, but the foods are sufficiently different that only some customers will leave the Thai restaurant.
What is Do and where profit is maximized, and how to calculate profit
Here D0 is the initial demand facing a representative firm, and MR0 is the corresponding marginal revenue curve. Profit is maximized where MC=MR, and the price P0 is obtained from the demand curve corresponding to the output q0. Total profit is the product of output times the difference between price and average cost, which equals q0×(P0−AC0).
Under what circumstances the demand curve will shift inward and until what moment it will shift inward
The increased number of firms reduces the share of the market that any one firm can claim. That is, the firm’s demand curve shifts inwards when entry occurs. As long as (economic) profits exist, this process continues.
For entry to cease, average cost must equal price. A final equilibrium is illustrated by the combination (PE,qE), where the demand has shifted inward to D.
The monopolistically competitive equilibrium in the long run
requires the firm’s demand curve to be tangent to the ATC curve at the output where MR=MC.
What is collusion
an explicit or implicit agreement to avoid competition with a view to increasing profit.
What is a conjecture
a belief that one firm forms about the strategic reaction of another competing firm.
Good poker players will attempt to anticipate their opponents’ moves or reactions. Oligopolists are like poker players, in that they try to anticipate their rivals’ moves.
What is a game
A game is a situation in which contestants plan strategically to maximize their profits, taking account of rivals’ behaviour.
What is the strategy in oligopoly
A strategy is a game plan describing how a player acts, or moves, in each possible situation.
What is a Nash equilibrium
one in which each player chooses the best strategy, given the strategies chosen by the other player, and there is no incentive for any player to move.
What is a dominant strategy
a player’s best strategy, independent of the strategies adopted by rivals.
How it is called and what is the best choice for Kate and Will and what is Nash equilibrium
A payoff matrix defines the rewards to each player resulting from particular choices.
In response to Will’s choice of a contribute strategy, Kate’s utility maximizing choice involves lazing: She gets 6 units by not contributing as opposed to 5 by contributing. Instead, if Will decides to be lazy what is in Kate’s best interest? Clearly it is to be lazy also because that strategy yields 3 units of happiness compared to 2 units if she contributes. In sum, Kate’s best strategy is to be lazy, regardless of Will’s behaviour. So the strategy of not contributing is a dominant strategy.
Hence, since each has a dominant strategy of not contributing the Nash equilibrium is in the bottom right cell, where each receives a payoff of 3 units
In competetive market we can achieve exact eqilibrium
Describe the graph
If B supplies a zero output, then A would face the whole demand, and would maximize profit where MC=MR. Let this output be defined by qA0
When one firm, B, chooses a specific output, e.g. qB1, then A’s residual demand DAr is the difference between the market demand and qB1. A’s profit is maximized at qA1 – where MC=MRAr. This is an optimal reaction by A to B’s choice
If y axes in A’s output and x is B’s waht would be the eqilibrium quantity
At this output level each firm is making an optimal decision, conditional upon the choice of its opponent. Consequently, neither firm has an incentive to change its output; therefore it can be called the Nash equilibrium.
