unit 2 review Flashcards
Perfect competition
- When there is many producers selling uniform products
- Many buyers and sellers that individual firms have no control over the total market supply
- Price takers (no control over price), prices are determined by the market (equilibrium)
- Little no-price competition: sell identical products
Short run
In the short run the equilibrium market price is determined by the interaction between market demand and market supply
Profit Maximization 1
Occurs when marginal revenue is equal to marginal cost (MR=MC)
- If P > AC = economic profit
- If P = AC = breakeven point
- If P < AC = economic loss
- If P < AVC = shutdown point
Long run
In the long run businesses enter and exit the market driving each perfect competitor to its breakeven point
- Economic profits causes businesses to enter the market and drive prices down
- Economic losses causes business to exit the market and drive prices up
Monopoly
One firm or organization enjoys complete control over the market
- Single firm: complete control over total supply
- Unique product (no close substitutes)
- Price-maker – by changing supply can get whatever price will maximize their total profits)
- No entry or exit (legal or financial barriers)
- No competition means that there is no need for non-price competition
Demand curve
- Since there is only a single seller, the demand curve is also the market demand curve
- Steep downward sloping
Revenue curve
Demand curve is equal to the average revenue
- Price per output
Since the demand curve (AR) falls as quantity increases, MR lies below
Profit maximization 2
- Profit maximizing output occurs when MR=MC
- At this output, they charge the highest price possible
- In the short-run, monopolists may break even or earn economic profit or loss
Monopolistic competition
- Product can be differentiated and there are a substantial number of firms operating in the market
- i.e. service and retail sectors (restaurants, clothing stores
Oligopoly
- Operate as huge firms in each of their respective markets
- Few large firms
Product may be similar or differentiated (steel vs. car) - Control to set price varies from slight to substantial
- Each firm has a large market share
- Common pricing strategy among oligopolistic may occur
- Significant barriers to enter: financial
- Significant non-price competition (loyalty, product differentiation)
Examples of oligopoly
-Big Five Banks
- -RBC, TD, Bank of Nova Scotia, BMO, and CIBC
-Three companies share 90% of Canada’s Wireless Market
- -Rogers, Telus and Bell
-Four Companies control the internet service provider market
- -Rogers, Bell, Telus and Shaw
Adam smith - the classical economists
- Wrote at the dawn of capitalism.
Analyzed society in terms of broad classes, historical change. - Celebrated creativity and thrift of the new class of capitalists.
- Identified division of labor as a source of productivity in a new industry.
- Believed prices reflected labor values, and that wages tended to subsistence.
- Markets and competition will lead to mutual benefits (including through international trade).
Karl Marx
- Critiqued the inhumanity and exploitation of capitalism.
- Argued that profit reflects social relations, not the real productivity of capital.
- Predicted that capitalism would end because of internal conflicts and instability.
- Recognized that prices do NOT equal labor values, but tried to explain how they are related to labor values.
- Co-founded international workers’ political party.
Leon walras- Neoclassical economics
- Founded in 1870s as response to Marx’s critiques and growth of socialist movements.
- Justified capitalism and the payment of profit.
- Focused analysis on individuals, not classes.
- Theory of general equilibrium, in which all markets (for factors and products) clear.
- Faith in self-adjusting, welfare-maximizing power of markets.
Came to dominate economics teaching.
John maynard keynes
- Wrote in context of 1930s: prolonged depression which disproved neoclassical model.
- Explained why long-run unemployment might exist.
- Showed that output and employment depend on spending power (“aggregate demand”).
- Advocated government intervention (spending, tax changes) to offset recessions.
- Intellectual underpinning for New Deal policies.
- In long-run, urged socialization of investment.
Milton friedman- fundamentalist
- Neoclassical theory tolerated Keynesian ideas until 1970s.
- Breakdown of Golden Age spurred rejuvenation of core faith in private markets.
- Milton Friedman: government intervention only causes inflation and unemployment.
- Advocated monetary targeting (“monetarism”) to control inflation, labour market “flexibility” (eg. deunionization) to solve unemployment.
- Intellectual underpinning for neoliberalism.
Law of diminishing marginal returns
When marginal product begins to decrease as more variable inputs (i.e. workers) are being added to an increasingly scarce fixed input (i.e. land or machines)
Elasticity
- allows us to analyze supply and demand with greater precision.
- is a measure of how much buyers and sellers respond to changes in market conditions
Elasticity of demand
- Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
- Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.
Elasticity of supply
- Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
- Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.
Determinants of elasticity of supply
- Ability of sellers to change the amount of the good they produce.
- Beach-front land is inelastic.
- Books, cars, or manufactured goods are elastic.
- Time period.
- Supply is more elastic in the long run.
