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cct219: Media Economics I > Week 7: market structures > Flashcards

Week 7: market structures Flashcards

1
Q

Breakeven point

A
  • where a business breaks even while maximizing profit
  • or a perfect competitor this occurs where price equals minimum average cost
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2
Q

Shutdown point

A
  • lowest price at which a business will choose to operate in the short run
  • when P = minimum AVC
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3
Q

The Profit-Maximizing Output Rule

A
  • MC = MR is the main goal (profit-maximizing output rule states that profit is maximized when marginal cost equals marginal revenue)
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4
Q

PMO Rule: output should be increased…

A

if marginal revenue exceeds marginal cost

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5
Q

PMO Rule: output should be decreased…

A

if marginal cost exceeds marginal revenue

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6
Q

Supply Curves

A
  • when MC = MR intersects (amount on the x-axis: ex. output of 180)
  • businesses should stop when they reach the max bc going over will be a loss
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7
Q

Calculating Profit Maximization for a Perfect Competitor

A
  1. Find when MC intersects MR
  2. Draw a straight line down (ex. output = 270)
  3. Repeat step 1 and find when the straight line intersects AC
  4. Go left to find price (ex. $5.04)
  5. Find area of triangle (l x w) (answer: 259.20)
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8
Q

Graphing profit maximization for monopolistic competition and oligopoly

A

check week 7 slides

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9
Q

A Perfect Competitor’s Supply Curve

A
  • is its marginal cost curve above the shutdown point
  • the market supply curve can be found by horizontally adding the supply curves for all the businesses in the industry
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10
Q

Supply Curve for Pure ‘n’ Simple T-Shirts Example

A
  • point C: day-to-day expenses (MC = AVC)
  • if a firm can afford their day-to-day expenses in the short run then they should stay open
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11
Q

Perfect Competition in the Long Run

A
  • if there is healthy competiton then the price will go down to cost
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12
Q

The Benefits of Perfect Competition

A
  • perfectly competitive markets in long-run equilibrium meet two conditions that benefit consumers:
  • minimum-cost pricing
  • marginal-cost pricing
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13
Q

minimum-cost pricing

A
  • price = minimum average cost
  • firms competiting with each other
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14
Q

marginal-cost pricing

A
  • price = marginal cost
  • firms finding cheapest way to produce a product
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15
Q

Monopolist’s Demand

A

same as for the entire market (downward sloping)

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16
Q

Monopolistic Competitor’s Demand

A

elastic because of many substitutes for the business’s product

17
Q

Oligopolist’s Demand

A
  • characterized by mutual interdependence
  • actions of each firm affects the other firms
  • can operate in 2 ways: rivalry (market share) and cooperation
18
Q

Mutual interdependence

A

a situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms)

19
Q

Rival Oligopolists

A
  • face a kinked demand curve
20
Q

Kinked demand curve

A

when the demand curve is not a straight line but has a different elasticity for higher and lower prices

21
Q

When a business raises their price…

A

rivals keep theirs constant, so demand is relatively flat

22
Q

When a business reduces their price…

A

rivals reduce theirs as well, so demand is relatively steep

23
Q

Cooperative Oligopolies

A
  • price leadership
  • collusion
  • cartel
24
Q

Price leadership

A

leader in market making price changes (oligopolies)

25
Q

Collusion

A

combinations, conspiracies or agreements among sellers to raise or fix prices and to reduce output in order to increase profits

26
Q

Cartel

A

a collection of independent businesses or organizations that collude in order to manipulate the price of a product or service

27
Q

Revenue Conditions for a Monopolist

A
  • same as the downward-sloping market demand curve
  • marginal revenue is below its demand curve because demand (average revenue) falls as quantity increases
28
Q

Profit Maximization for a Monopolist

A
  • maximizes profit at the quantity where marginal revenue and marginal cost are equal (MR = MC)
29
Q

Average-cost pricing

A

a policy used by regulators to set prices of goods and services equal or close to the average cost of manufacturing the product

30
Q

Fair rate of return

A
  • how much regulated companies may lawfully earn on their investments and expenditures
  • markup percentage

ex. utility companies

31
Q

Profit Maximization for a Monopolist Output

A

the monopolist charges the highest possible price, as found using the demand curve

32
Q

Monopolists meeting conditions

A
  • they neither meet the minimum-cost pricing nor the marginal-cost pricing conditions
  • bc they set their prices too high with low production
33
Q

Monopoly vs Perfect Competition Example

A
  • monopolist produces 200 airliners at $100m per bc they can
  • perfect competitors produce 300 airlines at $60m bc thats when MC intersects D

cct219: Media Economics I (12 decks)

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