Unit 7: The Firm: Customers Flashcards
What is a price-setter?
A firm that chooses the price of its product rather than taking the market price.
Why do firms have market power?
Because of product differentiation, few competitors, and customer loyalty.
What is a demand curve?
A curve showing the quantity demanded at each price.
What is total revenue (TR)?
Price multiplied by quantity.
What is marginal revenue (MR)?
The additional revenue from selling one more unit.
What is the profit-maximising condition for firms?
MR = MC (marginal revenue equals marginal cost).
What does it mean if Price > MC?
The firm has a mark-up and market power.
How is mark-up calculated?
Markup = (P - MC) / P.
How does elasticity affect mark-up?
Less elastic demand allows higher mark-ups.
What market structures exist in economics?
Perfect competition, monopolistic competition, oligopoly, monopoly.
What is perfect competition?
A market with many firms, identical products, and no market power.
What is a monopoly?
A market with one firm that has significant market power.
What is oligopoly?
A market with few firms that must consider rivals’ reactions.
What is price discrimination?
Charging different prices to different customers for the same good.
What is first-degree price discrimination?
Charging each consumer their maximum willingness to pay.
What is second-degree price discrimination?
Charging different prices based on quantity purchased.
What is third-degree price discrimination?
Charging different prices to different groups (e.g., student discounts).
Why is price-setting not Pareto efficient?
Because some consumers who value the good above MC don’t buy it.
What is deadweight loss?
Lost welfare due to inefficient output level (Price > MC).
How can policy address market power?
Through competition law, regulation, and encouraging new firms.
