Econ Exam 3

What is a zero-sum game?

A game in which any gains within the group are offset by equal losses by the end of the game.

Characteristics of oligopoly

A market structure in which there are very few sellers. Each seller knows that the other sellers will react to its changes in prices, quantities, and qualities. 1. Small number of firms 2. Interdependence

What are the social costs of a monopolist?

A monopoly is able to charge the highest price that people are willing to pay. This price exceeds marginal cost. If the monopolist's marginal cost curve corresponds to the sum of the marginal cost curves for the number of firms that would exist if the industry were perfectly competitive instead, then the monopolist produces and sells less output than perfectly competitive firms would have produced and sold.

When does a natural monopoly arise?

A monopoly that arises from the peculiar production characteristics in an industry. It usually arises when there are large economies of scale relative to the industry's demand such that one firm can produce at a lower average cost than can be achieved by multiple firms.

What is meant by Price Taker?

A perfectly competitive firm that must take the price of its product as given because the firm cannot influence its price.

Search good

A product with characteristics that enable an individual to evaluate the product's quality in advance of a purchase.

Credence good

A product with qualities that consumers lack the expertise to assess without assistance.

Network effect

A situation in which a consumer's willingness to purchase a good or service is influenced by how many others also buy or have bought the item.

How does a tariff act as a barrier?

Tariffs are special taxes that are imposed on certain imported goods. Tariffs make imports more expensive relative to their domestic counterparts, encouraging consumers to switch to the relatively cheaper domestically made products. If the tariffs are high enough, domestic producers may be able to act together like a single firm and gain monopoly advantage as the sole suppliers. Many countries have tried this protectionist strategy by using high tariffs to shut out foreign competitors.

What is the profit-maximizing output for a perfectly competitive firm?

The Profit-Maximizing Output Rate The firm should continue production until the cost of increasing output by one more unit is just equal to the revenues obtainable from that extra unit. Profit maximization occurs at the rate of output at which marginal revenue equals marginal cost.

Marginal Cost

The change in total costs due to a one-unit change in production rate. Marginal cost = change in total cost / change in output

Marginal Revenue

The change in total revenues resulting from a one-unit change in output (and sale) of the product in question.

What does the Marginal Revenue Curve represent for a Perfectly Competitive firm?

edit

Total Revenue

equal the price multiplied by the number of units purchased.

Variable input

or variable factors of production. Typically, the variable inputs of a firm are its labor and its purchases of raw materials. In the short run, in response to changes in demand, the firm can, by definition, change only the amounts of its variable inputs.

What is the most common reason why oligopolies exist?

1. Economies of scale 2. Barriers to entry 3. Oligopoly by merger

What are the necessary conditions for price discrimination?

1. The firm must face a downward-sloping demand curve. 2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand. 3. The firm must be able to prevent resale of the product or service.

Characteristics of Perfect Competition

1. There are large numbers of buyers and sellers. No one buyer or seller has any influence on price. 2. The product sold by the firms in the industry is homogeneous—that is, indistinguishable across firms. Buyers are able to choose from a large number of sellers of a product that the buyers regard as being the same. 3. Both buyers and sellers have access to all relevant information. Consumers are able to find out about lower prices charged by competing firms. Firms are able to find out about cost-saving innovations that can lower production costs and prices, and they are able to learn about profitable opportunities in other industries. 4. Any firm can enter or leave the industry without serious impediments. Firms in a competitive industry are not hampered in their ability to get resources or redistribute resources. In pursuit of profit-making opportunities, they reallocate labor and capital to whatever business venture gives them their highest expected rate of return on their investment.

Mass marketing

Advertising intended to reach as many consumers as possible, typically through television, newspaper, radio, or magazine ads.

Direct marketing

Advertising targeted at specific consumers, typically in the form of postal mailings, telephone calls, or e-mail messages.

Cartel

An association of producers in an industry that agree to set common prices and output quotas to prevent competition.

Economies of Scale

Decreases in long-run average costs resulting from increases in output.

Marginal Product

The output that is due to the addition of one more unit of a variable factor of production. The change in total product occurring when a variable input is increased and all other inputs are held constant.

What does interdependence mean?

Each firm in the industry knows that other firms will react to its changes in prices, quantities, and qualities.

Fixed/Variable Costs

Fixed costs: Costs that do not vary with output. Fixed costs typically include such expenses as rent on a building. These costs are fixed for a certain period of time (in the long run, though, they are variable). Variable costs: Costs that vary with the rate of production. They include wages paid to workers and purchases of materials.

What does a firm's short-run costs contain?

In the short run, a firm incurs certain types of costs. We label all costs incurred total costs. Then we break total costs down into total fixed costs and total variable costs.Remember that these total costs include both explicit and implicit costs, including the normal rate of return on investment. Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)

What are barriers to entry?

Licenses, Franchises, and Certificates of Convenience. It is illegal to enter many industries without a government license, or a "certificate of convenience and public necessity." To enter interstate (and also many intrastate) markets for pipelines, television and radio broadcasting, and transmission of natural gas, to cite a few such industries, it is often necessary to obtain similar permits. Because these franchises or licenses are restricted, long-run monopoly profits might be earned by the sellers already in the industry.

What is the major difference between a monopolist and a perfectly competitive firm?

MONOPOLY VERSUS PERFECT COMPETITION Notice that Qm is less than Qe and that Pm is greater than Pe. Hence, a monopolist produces a smaller quantity and sells it at a higher price. This is the reason usually given when economists criticize monopolists. Monopolists raise the price and restrict production, compared to a perfectly competitive situation.

Price Discrimination

Selling a given product at more than one price, with the price difference being unrelated to differences in marginal cost.

Short/Long Run in Economics

Short run: The time period during which at least one input, such as plant size, cannot be changed. Long run: The time period during which all factors of production can be varied.

When does a perfectly competitive firm shut down in the short run?

Short-run break-even price: The price at which a firm's total revenues equal its total costs. At the break-even price, the firm is just making a normal rate of return on its capital investment. (It is covering its explicit and implicit costs.) Short-run shutdown price: The price that covers average variable costs. It occurs just below the intersection of the marginal cost curve and the average variable cost curve.

Dominant strategy

Strategies that always yield the highest benefit. Regardless of what other players do, a dominant strategy will yield the most benefit for the player using it.

What does the concentration ratio measure?

The percentage of all sales contributed by the leading four or leading eight firms in an industry; sometimes called the industry concentration ratio.

What is a reaction function?

The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry.

What relationship does the law of diminishing marginal product show?

The observation that after some point, successive equal-sized increases in a variable factor of production, such as labor, added to fixed factors of production will result in smaller increases in output. As successive equal increases in a variable factor of production are added to fixed factors of production, there will be a point beyond which the extra, or marginal, product that can be attributed to each additional unit of the variable factor of production will decline.

Production Function

The relationship between inputs and maximum output. A production function is a technological, not an economic, relationship.

Monopoly

The single supplier of a good or service for which there is no close substitute. The monopolist therefore constitutes its entire industry.

Economic Profits

Total revenues minus total opportunity costs of all inputs used, or the total of all implicit and explicit costs.

Types of mergers

Vertical merger: The joining of a firm with another to which it sells an output or from which it buys an input. Horizontal merger: The joining of firms that are producing or selling a similar product.