MORE Knowledge II Flashcards
WHAT are “Nominal Wages?”
Amounts actually paid to laborers and receive
WHAT is Elasticity?
The sensitivity of consumer reaction to a change in the price of a good or service
E.g. If price elasticity of demand is greater than 1, a certain percentage change in price will result in a greater percentage change in the quantity demanded
WHAT is a result of a Price Ceiling?
THEY create prices below equilibrium prices
WHY? - Because Government-imposed price ceilings artificially set prices lower than price equilibriums
If prices are set artificially low, demand will exceed supply (resulting in shortages)
SHOULD monopolistic competition be looking to acquire other firms in the industry life cycle?
NO. If a firm was looking to make an acquisition, they would no longer be producing one specific variety of product
E.g. They would no longer be operating in a monopolistically competitive environment
WHAT is a clear difference between a Perfectly Competitive Market and a Monopolist Market?
A monopolist market produces substantially less but charges a higher price
WHAT is a distinguishing characteristic of an Oligopolistic market?
Mutual interdependence of firm pricing and output decisions
E.g. The oligopoly model is much less specific than the other market structures
NOTE: Price leadership is typical in oligopolistic industries
WHAT does it mean when an Oligopolist faces a “kinked” demand curve?
THAT when an Oligopolist lowers its price, the other firms in the oligopoly will match the price reduction,
BUT if the Oligopolist raises its price, the other firms will ignore the price change
WHAT market reaction does a government price support program lead to?
THIS Leads to surpluses
WHY - Because a government price support program, which sets a price higher than the market price, will cause producers to supply more goods than can be absorbed by the market
WHAT would happen if demand increases and supply decreases?
THE equilibrium price would increase
Increased demand signifies a rightward shift in demand curve (quantity demanded increases at each price)
Decreased supply involves a leftward shift in the supply curve (reduced quantity supplied at each price)
Both events will increase price equilibrium
WHAT will a Monopolist pay its workers compared with a firm that must hire from a competitive labor market?
A Lower wage (and hire fewer workers)
WHY? - Because a monopolist maximizes profits by equating the “Marginal Cost” of labor with the “Marginal Revenue” product of labor
Thus they will pay a lower wage rate, and produce lower output
WHAT would cause the demand for Normal goods to Fall?
IF there is a price increase in complementary goods
WHY? - Because when two normal goods are complements, the price of one good and the demand for the other are inversely related
E.g. Tennis Rackets and Tennis Balls
WHAT would happen if a company consistently cuts its prices and product demand is significantly elastic?
QUANTITY increases would be proportionally more than the price declines
WHY? - Because when demand is significantly elastic, the percentage change in the quantity demanded is higher than the percentage change in price
WHAT is a characteristic of Economies of scale?
WHEN long-run average cost is declining over a range of increasing output
HOW do cartels set and maintain price above the competitive market price?
BY requiring cartel members to restrict output
E.g. A cartel arises when a group of oligopolistic firms join together for price-fixing purposes (i.e. it is definitely illegal)
WHAT is Collusive pricing?
WHEN pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry
WHAT is Predatory pricing?
THE practice of offering goods or services at an extremely low price designed to force competitors out of the market
WHAT is Group Boycott?
A concerted effort to avoid doing business with a particular supplier, often in retaliation for some policy followed by the supplier
WHAT is the affect on output from production based on economies of scale?
The short-run average cost of production decreases
WHY? - Because the average unit cost of production decreases as production increases
i.e. attributable to spreading fixed costs over a greater number of units produced
WHAT is Marginal revenue?
THE change in revenue from selling one additional unit of product
NOTE: Marginal revenue
- Is constant in pure competition but declines as output rises in other market structures; and
- Declines as sales increase because prices eventually must be lowered to stimulate demand
WHAT is the effect of the selling price exceeding average variable cost?
A contribution margin is earned
NOTE: In the short-run, a firm should continue to operate as long as selling price exceeds average variable cost
If selling prices drops below average variable cost, variable costs as well as fixed costs are no longer being met, and the firm should shut down
