WEEK 7-12 Flashcards
There are many what in perfect competition
Many buyers
Many sellers
In perfect competition outputs from sellers are
Homogeneous
In perfect competition buyers know what
All the info from all the sellers
Are there barriers to entry in perfect competition
No
How are the products in imperfect competition
Different to other competitors
Many firms are what in imperfect competition
Price setters
Can firms raise prices in imperfect competition
Yes
In perfect competition demand is
Perfectly elastic
In imperfect competition demand is
Downwards sloping
What are the 3 types of imperfect competition
Pure monopoly
Oligopoly
Monopolistic competition
Monopoly characteristics
many buyers
1 seller
No close substitutes
Buyers informed of competing suppliers
Barriers to entry
What are the 3 revenues
Average revenue - AR
Total revenue - TR
marginal revenue - MR
How to get TR from AR
Times AR by Q
How to get MR from TR
Differentiate TR
What are the 3 costs
Total cost - TC
Average Cost - AC
Marginal cost - MC
How to find AC from TC
Divide TC by Q`
How to find MC from TC
Differentiate TC
When is profit maximized
When TR>TC and vertical distance between TR and TC is greatest
In math’s questions MR = what
MR = MC
Why are monopolies inefficient in terms of price
Prices are higher since sole firm
Why are monopolies inefficient in terms of quantity
The quantity will go down so less goods and services
Why are monopolies inefficient in terms of surplus
The customer surplus is smaller so customers pay more and receive less value
3 conditions for price discrimination
Price setter
Can identify customers
Customer’s can’t resell
Example of a 2nd degree price discrimination
Promotion codes
Example of a 3rd degree price discrimination
Older people take buses instead of walking whereas younger people walk
In perfect competition do price setters care about competitors prices
No
Is there competitors in a monopoly
No
Whats game theory used to do
Distinguish rational and intelligent decision makers
What are the 2 main types of games
Simultaneously played
Sequential played
Features of a simultaneously played game
Moves chosen simultaneously
Player doesn’t know the others actions
Features of a sequentially played game
Moves made one after another
Players know what the previous move was
The 3 elements of a sequential ame
Players
strategies
Play offs / utilities
How to solve a game
Stable outcome
Reached by rational thinking
Why is it best to have a stable outcome
Players don’t change their mind
Whats the best way to solve a game
Finding the Nash equilibrium
What is iterated dominance
Means illogical actions can be deleted
How to solve a game with one Nash Equil
Choose the Equil
How to solve a game with more than one Nash Equil
Choose any of them
How to solve a game with no equilibrium
No logical way to choose, turns into a probability distributions
What are the 2 types of repeated games
Finitely repeated games
Infinitely repeated games
How many strategies do infinitely repeated games have
2
What are the 2 strategies for infinity games called
Grim trigger
Tit for tat
What is grim trigger
Will cooperate until defection then will defect for the rest of the game
What is tit for tat
Repeating the previous action
People are not always what
self-interested
People can make decisions on what
Social preference
Examples of social preferences people can make decisions on
Inequality aversion
Kindness reciprocity
Guilt aversion
Are business cartels usually legal
No
Whats the biggest cartel
OPEC - Petroleum producers who also are policy setters
Tit-for-tat is weakened when what
more than 2 players in a game
Why is there instability in cartels
News firms can enter and cut a price below the cartel and gain all the customers, can produce more than the cartel too
The cournot model is when firms
Choose output levels
the bertrand model is when firms
Decide on price
How many firms can be modeled in the cournot model
2 or more
What assumptions are made in the cournot model
Highly sustainable products
Firms have same tech and input costs
Constant unit costs
straight demand curve
Whats the reaction function
The best response of a player
If firms maximize profits what the best response in the cournot model
The best response is the response that yeilds the highest profit
In the cournot model with 2 firms, if a firms output is P=AC and Profit = 0, the other firm should
The other firms best choice is not to produce anything
In the cournot model with 2 firms, if one firm chooses to produce nothing the best choice for the other firms output is
The monopoly output
The closer its output is to the monopoly output on its own axis means what
The higher its profits are
In the cournot model with 2 firms, what are the axis labeled on the reaction function
Firm 1 output = x
Firm 2 output = y
What are the 3 things in cournot equilibrium
Firms simultaneously decide output
Profit maximisation
No further changes
Under cournot equilibrium, Each firm is setting MC equal to what
MR
Under cournot equilibrium, On the reaction curve where is production happening
Left of the point at which AC reaches a minimum
Under cournot equilibrium, Industry output is below what
What a perfectly competitive industry would provide, but above what a monopolist would provide
Under cournot equilibrium, firms earn what profit
Super normal profit, but not as much as if they colluded in a cartel
What is the Bertrand competition
The name given to oligopolistic strategies based around price-setting
In the bertrand competition, firms compete on what
Price
In the bertrand competition, what is assumed
Others will charge the current price
In the bertrand competition, who can undercut
Any firm if the price doesn’t drop beneath the MC
What is the bertrand paradox
That when the prices are undercut they can converge to the competitive level equal to MC or be higher
3 Reasons the bertrand paradox wouldn’t hold in terms of constraints
Firms have capacity constraints, and output cannot increase sufficiently for price to be driven down so low
3 Reasons the bertrand paradox wouldn’t hold in terms of differentiation
Product differentiation means that the firms’ products are not highly substitutable
3 Reasons the bertrand paradox wouldn’t hold in terms of short-term
Firms know that the short-term gain of undercutting leads to less profit in the future
When does monopolistic competition arise
When there are many buyers and sellers, and sellers can differentiate their products
What slope is in monopolistic competition
Downwards slope
What are the profits like in monopolistic competition
Profits in short-run, but these are competed away by entry of new fimrs so that in the long run supernormal profits are 0
The monopolistic competition equilibrium involves
Lower output and a higher price than under perfect competition
the 2 options to model labour
Spend time working
Spend time leisure
the substitution effect of a wage change on labour supply is always what
positive
The income effect of a wage change on labour can be what
positive or negative
Whats the equation for Marginal value product of labour
MVPL = marginal product of labour x output price
What is the marginal cost of labour in perfect competition
Wage
Firms will employ workers up to the point where
Wages = MVPL
IN monopoly power what does MPL x MR make
labour demand curve
What is left out of MVP in monopolies
MRP
Why is MRP left out of MVP in monopolies
As a monopoly produces less output than a competitive firm - employs less workers
In a monopsony MCL will be what sloping
Upwards sloping
In monopsony power profit maximisation occurs where
MCL = MRP
Wage is determined by what in monopsony
Average cost of labour
When do firms gain monopsony powers
When workers are not constantly searching for other jobs
What are 5 reasons there is difference in earnings
Human capital explanation
Trade unions
Compensating wage differentials
Discrimination by employers
Discrimination by others
What is the human capital explanation
Pay is determined on their stock of “human capital”
What is human capital
Certain factors of someone such as education, energy, experience
Why does trade unions explain differences in wages
Group of workers bargain with employers for better wages
Why does compensating wage differential explain differences in wage
Can expect jobs with worse working conditions to pay more than one with nice conditions
Why does discrimination by employers explain differences in wage
An employer reflects a preference for a group of workers compared to another
Why does discrimination by others explain differences in wage
Customers might want to only buy a product produced by their favored group
What was the % of the bottom 20% of income distribution in 2008
3.4%
What was the % of the highest 20% of income distribution in 2008
50.3%
What is the gini coefficient
A measure of equality and distribution on income or wealth by percentages of households or individuals from poorest to richest
What does the gini coefficient provide
A basis for comparing distributions on an onjective numerical basis
If the income of the population was perfectly equal what would happen to the gini coefficient graph
45 degrees line
What is the Lorenz curve
The graph of the cumulative distribution of income by % of people from poorest to richest
What foes an indifference analysis show
Shows preferences for working and leisure
Example of something that can be used as a budget constraint
A weekly wage
is a budget constraint a curved or straight line
Striaght
How do indifference labour demand graphs show how many hours of labour should be done
When the budget line and indifference curve touch
The substitution effect shifts left or right on the labour demand graph
Right
What are the X and Y axis on labour graphs
X = Leisure
Y = Income
At high wages what can happen
the income effect dominates the substitution effect
What does the income effect dominating the substitution effect mean
leads to a backward bending supply of labour
What graph shape can high wages lead to
A reverse c
What does overtime introduce in labour demand graphs
A kink (An extra downwards line that will hit a higher indifference curve as more income)
Will a monopoly hire more or less workers
Less as less output
What can a minimum wage generate
An excess supply of labour - unemployment
What can a minimum wage do under a monopsony
Raise employment
When a minimum wage is imposed the MCL becomes what
the minimum wage
uncertainty doesn’t equal what
Risk
What does uncertainty refer to
Situations where the probability is unknown
Risk activities have what characteristics
Likely outcome
Degree of variation
If EV = 0
Going to make on average 0
If EV>1
Going to make profit
IF EV<1
Going to lose money
If 50% = 100 and 50% = -100 whats its EV
0.5 x100 + 0.5 x -100 = 0
how to work out EV with a price to play the game
EV - cost
When is the lottery unfair
When EV is above or below 0
What are the risk profiles for people
Risk-averse
Risk-neutral
Risk-loving
The 2 types of info a decision maker wants
Hidden characteristics
hidden actions
what are hidden characteristics and an example
Things one side of the transaction knows about itself
Selling a laptop you know is broken
What are hidden actions and an example
Actions taken by one side that the other can’t observe
People recklessly driving after getting insurance
what can asymmetric info do in regards to price discrimination
It can go against the 3 conditions - EG it hidden info means firms don’t know peoples willingness so can’t know their demand for a product
Can firms in perfect competition price discriminate
Yes
Why can firms in perfect competition charge different amounts
As they know the willingness of people to pay
how can firms in imperfect competition find ways to find hidden characteristics
Can charge different amounts - Airports charge more for a flight with no restrictions vs one with restrictions
Examples of firms finding hidden characteristics
Auctions always find the highest marginal prices
Under symmetric info how do wages work
better workers better paid
What happens with wages for high ability workers under asymmetric info
Try to reveal themselves as better so they are paid better
Example of high ability people trying to reveal themselve
after uni everybody has a degree but some have a first class degree versus a second
What is adverse selection
When the uninformed side of a deal gets the wrong people trading with them
What does the markets for lemons model say
Asymmetrical info tends to reduce the average quality of goods sold
People with worse stuff are more likely to sell
If good cars are worth 10k and are 90% of the market and bad cars are worth 6k and are 105 of the market what should your reservation price be
0.9 x 10000 + 0.1 x 6000 = 9600
What is a moral hazard
people take fewer precautions as they know they will be bailed out
Example of a moral hazard
If a bank is to big to fail they will take bigger risks as they know they will be bailed out
Why is a total damage graph downwards sloping
More care is being put into it
Whats the X and Y axis of an expected total damage graph
X = units of care
Y = Units of all other goods
In fire prevention graphs what does marginal benefit mean
Reduction in expected damages
Why is the Marginal benefit line downwards sloping
As more care is taken, the last increment of care has less of an effect on the risk of fire than the earlier units of care
How to find the height of the marginal benefits line
-1 x the gradient of the TD curve
With insurance the equalibirum on a marginal benefit line shifts how
Shifts left
More or less units of care with insurance
less
Whats a co-insurance
Insurance where the policy holder picks up some of the bill
Example of a co -insurance
If some thing is £1,000 they might make you pay 20% of it
Where is the equilibrium with a co-insurance
In between no insurance and insurance
Whats a way of an insurance holder bearing some risk
An excess or premium on a policy
Whats the opportunity costs
the cost is the value of the next best option
What would be the X and Y axis on a PPC graph
The 2 products being created
What are the 4 points on a PPC graph
Inefficient point
Attainable point
Efficient point
unattainable point
Whats an inefficient point
Any combination of goods where resources enable an increase in the production of one good without a reduction in production of the other
What’s an attainable point
Any point on the line
Whats an efficient point
Any combination that doesn’t allow an increase in the production of one good without a reduction in the other
Whats an unattainable point
A combination of goods that cannot be made
Whats a comparative advantage
If one person has an advantage in a task or thier opportunity cost of performing a task is lower than the other person’s opportunity cost
where is an inefficient point on a PPC
Left of the line
Where is an unattainable point on a PPC graph
Right of the line
How do you write the tables out for advantages
Output and units going across
names going down
If joe makes 8 bread and 6 beer what is the opportunity cost of him producing one bread
6/8 or 0.75%
Why is international trade better
The basis of comparative advantage improves global output
What can be instead of units per hour in the comparative advantage tables
fractions of an hour - instead of 6 bread per hour it will be 1/6 of an hour per bread
Taxes on imports are called what
taridds
Tariffs lead to what
A welfare loss
Do tariffs increase or decrease consumer surplus
Decreases
How are tariffs shown on a graph
A horizontal line coming from the y axis
Will quantity rise or fall under tariffs
Fall
Under tariffs who gains and loses
Consumers lose
Producers gain
How to solve comparative advantages
Read table
Divide left by right per person
See what ratio is higher
Then vice versa
In a monopoly, profit is maximized when
MR = MC
If AR = 12 - 8q what is the MR
MR = 12 - 16q
If TC = 40 + 0.8q^2 then whats the MC
MC = 1.6q
is it possible for a normal form game not to have a pure strategy nash equilibrium
yes
In game theory assuming players are rational means
They will choose the option that gives them the most
How to find the nash equilibrium
The option is when both sides get the same out, but it doesn’t deviate from their original strategy
In the short-run what profits are in monopolistic competition
Supernormal
In the long term how are the profits in monopolistic competition
0
The cournot model is when firms choose output levels true or false
True
The bertrand model is when firms decide on price true or false
True
Are cartels always illegal
No
In a perfectly competitive labour market, a workers value to the employer depends on how many units of goods she produces
False - depends also on price of good and wages
MPL is the money value of additional output for employing another unit of labour - true or false
False - MPL is physical output, MVPL is money output
If a firm has monopsony power in the labour market, its MCL will be horizontal - true or false
False - MCL will be sloping upwards
A monopolist could face competition in the labour market - true or false
True
Does a person have a comparative advantage over another if they can earn more performing a task than the other
No - Have a comparative advantage if their opportunity cost is lower than the others opportunity cost
In a perfectly competitive and monopolistic industry the demand curve is downwards sloping - T or F
F - Both are downwards
Perfectly competitive firms have no control over the price they charge - T or F
True
for natural monopolies AC declines as the supply rises - T or F
True
A single-price profit-maximising monopolist will always price above the Marginal cost of production - T or F
T
If a monopolist could perfectly price discriminate:
a. The marginal revenue curve and the demand curve would coincide.
b. The marginal revenue curve and the marginal cost curve would coincide.
c. Every consumer would pay a different price.
d. Marginal revenue would become negative at some output level.
e. The resulting pattern of exchange would still be socially inefficient.
A
