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ECON 2302 > UNIT 3 > Flashcards

UNIT 3 Flashcards

1
Q

CHAPTER 12 START
what are the characteristics of a pure monopoly

A
  • single seller: a sole producer
  • no close substitutes
  • price maker: control over price
  • blocked entry:
  • non-price competition
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2
Q

examples of monopoly

A

public utility companies
- natural gas
- electric
- cable television
near monopolies
- intel
- android

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3
Q

what are the barriers to entry

A

factors that prevent firms from entering the industry, e

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4
Q

what are barriers to entry?

A

prevent firms from entering the industry

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5
Q

how are economies of scale a barrier to entry?

A

because a very large firm with a large market share is most efficient, new firms cannot afford to start up industries with economies of scale

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6
Q

explain legal barriers to entry like patents and licenses

A
  1. Patents grant the inventor the exclusive right to produce or license a product for twenty years; this exclusive right can earn profits for future research, which results in more patents and monopoly profits.
  2. Licenses are another form of entry barrier. Radio and TV stations and taxi companies are examples of government-granting licenses where only one or a few firms can offer the service.
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7
Q

explain how ownership or control of essential resources acts as a barrier to entry

A

think of leases on major city stadiums

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8
Q

what are the three assumptions when it comes to analyzing monopoly demand

A
  • the monopoly is secured by patents, economies of scale, or resource ownership
  • the firm is not regulated by any unit of government
  • the firm is a single-price monopolist; it charges the same price for all units of output
    demand curve is downward sloping, there is no supply curve
    MR < P
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9
Q

what is a price marker?

A

a firm with pricing power, the monopolist avoids setting the price in the inelastic range of demand because doing so would reduce total revenue and increase the cost. The monopolist sets the price in the elastic region of the demand curve so that revenues will be higher and costs lower

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10
Q

identify the steps for determining the profit-maximizing output, profit-maximizing price, and economic profit in a pure monopoly

A

STEP 1: determine the profit-maximizing output by finding where MR = MC
STEP 2: determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve
STEP 3: profit = ATC (step 1 and 2) x (profit-maximizing output-economic profit)

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11
Q

what are the economic effects of a monopoly?

A
  • simultaneuos consumption
  • income distribution is more unequal than it would be under a more competitive situation
  • network effects
  • x-inefficiency: no competitive pressure to produce at the minimum possible costs
  • rent-seeking behavior
  • technological advance
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12
Q

explain the relationship between the government and monopolies

A
  • antitrust laws: break up the firm
  • regulate it: government determines price and quantity
  • ignore it: let time and markets get rid of monopoly
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13
Q

what are the characteristics of a regulated monopoly?

A

socially optimal price: set price equal to margincal cost
fair return price:
- set price equal to ATC
- dilemma of regulation

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14
Q

CH. 13 START
what are the characterictics of monopolistic competition

A
  • relatively large number of sellers
  • product differentiation
  • easy entry and exit
  • nonprice competition like advertising
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15
Q

what is the formula of 4-firm concentration ratio

A

output of four largest firms / total output in the industry

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16
Q

what is the formula of the herfindahl index

A

sum of squared market shares (percentage)
- the lower the HI, the more competitive the industry

17
Q

describe price and output in monopolistic competition

A
  • demand is highly elastic, but not perfect
  • short-run profit or loss: produce where MR = MC
  • long run only when there is normal profit: entry and exit
18
Q

describe monopolistic competition and efficiency

A

when P > min ATC, condition for productive inefficiency
when P > MC, condition for allocative inefficiency

19
Q

what is excess capacity

A

excess capacity in the industry means that the plant and equipment are underutilized because firms are producing below minimum ATC output

20
Q

how does product variety help monopolistically competition

A

helps compensate for its failure to achieve economic efficiency. Consumers have a wider array of products to choose from and, presumably, they have better quality products to choose from as well.

21
Q

what is the difference between a monopoly and monopolistic competition

A

A monopoly is the type of imperfect competition where a seller or producer captures the majority of the market share due to the lack of substitutes or competitors. A monopolistic competition is a type of imperfect competition where many sellers try to capture the market share by differentiating their products.

22
Q

CH. 14 START
describe what makes a market an oligopoly

A
  • an oligopoly has few more producers than a monopoly
  • they have homogenous and differentiated in their products such as steel and automobiles
  • because they have limited control over pricing, they use strategic pricing behavior
  • interdependence
  • although some firms have become dominant as a result of internal growth, others have gained dominance through mergers
23
Q

describe what is an ologopoly

A
  • the four firm concentration ratio must be at least 40%
24
Q

describe the behavior of an oligopoly

A
  • game theory: the study of how people behave in strategic situations
  • prisoners dilemma: mutual interdependence and game theory
  • COLLUSION: cooperating with rivals that can benefit the firm, however, there is an incentive for firms to cheat on their agreement to collude because cheating can result in increased revenues for the cheater
25
Q

what are the three oligopoly models

A
  • kinked demand curve
  • collusive pricing
  • price leadership
    the reason for there being three models is because of the diversity of the oligopolies and complicaitions of interdependence
26
Q

describe the kinked demand theory

A

used for non-collusive oligopolies to explain their behaviors and pricing strategies
the firms assume that their rivals will match any price reductions in an effort to maintain their customers. On the other hand, it is reasonable to assume that if a firm raises its price, its rivals will ignore the price change in an effort to steal customers from the firm raising its price

27
Q

what is a cartel

A

group of firms or nations that collude
- formally agreeing to the price
- sets output levels for members

28
Q

what are some obstacles to collusion?

A
  • differences in demand and cost
  • the more # of firms, the harder it is to maintain
  • there is always a tendency for members to cheat
  • demand declining during a recession makes cheating more tempting
  • new entrants are drawn to the greater prices and profits, leading to an increase in the market supply and decreases prices
  • legal obstacles such as cartels being illegal in the U.S.
29
Q

what is the significance of resource pricing?

A

resource prices are a major factor in determining the income of households
to make the most money, firms must produce at the profit-maximizing output with the least costly combination of resources
ceo pay, labor unions, and minimum wage increases are based on resource pricing

30
Q

describe derived demand for resources

A

assuming perfect competition:
- resources are bought and sold in perfectly competitive markets and that the products produced by the resources are also bought and sold in perfectly competitive markets
derived demand resources depend on:
- marginal product of the resource
- price of the product it produces

31
Q

what is the marginal revenue product equation

A

marginal revenue product = change in total revenue / change in resource quantity

32
Q

what is the marginal resource cost equation

A

marginal resource cost = change in total cost/ change in resource quantity

33
Q

describe the marginal productivity theory of resource demand

A

a firm will maximize profits at the point at which marginal revenue product equals marginal resource cost

34
Q

what are the determinants for resource demand?

A
  • an increase in the demand for a product will increase the demand for a resource used in its production
  • quantities of other resources
  • technological advance
  • quality of the variable resource

ECON 2302 (3 decks)

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