ECON EXAM 4

Price Ceilings

Can limit market power (laws that create a max price, binding if too low) with these, choose where, quantity= demand curve

long run

Entering or exiting an industry is a ________ ________decision

competition

If ________ (more firms of the same markets form) decreases, economic outcomes decrease

differentiate

If price competition is intense, ________ your product

appeal

If price competition is subdued, _______ to as many customers as possible

output effect (P)

Increase in revenue from selling one more unit

product positioning

Is making a choice about the attributes that a product has relative to its competition

Profit Margin

Net Income/Sales Revenue Q(P-AC)

Optimal Price Ceiling

P=MC

government policy

Patents, Regulations in compulsory licenses, licensing

Anti-collusion laws

Prevent businesses from agreeing not to compete

Merger Laws

Prevent competing businesses from combining to consolidate market power (reduces competition... causes prices to rise & profits to increase)

as many

Products should be positioned to be attractive to _____ _______ customers as possible, while being different from competitors

Discount Effect (P x Q)

Revenue loss from cutting the price on all units sold *if you increase quantity, price will decrease on all units*

short run

Shutting down is a _______ ______ decision

Bargaining power of suppliers

Suppliers can threaten success by charging higher prices or refusing to do business

near

The best strategy is to locate ______ your competition. the closer you are the more customers you will get.

short run

Time horizon over which production capacity and the number and type of competitors you face cannot change

Long Run

Time horizon over which you or your rivals make expand or contract production capacity and firms may enter or exit the market

elastic

When firms enter in the market customers become more price sensitive and the demand curve is more ________. (looking for lower prices)

Inelastic

When more firms exit the market, customers become less price sensitive and the demand curve is more ________. (price is common to be worth so much for the market)

price competition

________ ________ can spark a price war that pushes profits to zero

perfect competition def

a market structure in which a large number of firms all produce the same product

imperfect competition def

a market structure that does not meet the conditions of perfect competition

Median voter theorem

a mathematical result showing that the voter with the ideological preference in the middle of the ranking of voters must be satisfied and approve of a majority-rule winning outcome

research and development

a set of activities intended to identify new ideas that have the potential to result in new goods and services · It's easier for larger companies to put money into research over smaller companies (i.e., vaccines through Johnson & Johnson and Pfizer)

problems with market power can be addressed through

a) laws that ensure competition thrives b) laws that minimize harmful ways that businesses might exploit their market power

Types of Profit

accounting profit and Economic profit

informative advertising

advertisements that give info

demand curve

as competition rises, the firms _____________ becomes more elastic/ flatter

learning by doing

as we do something, we learn what works and what doesn't, and over time we become more proficient at it · Experience pushes average cost down · You get more efficient with experience so you can sell stuff for cheaper but still remain profitable

regulations in compulsory licenses

barriers that prevent people from starting competition (ie, needing medical/cosmetic licenses)

Network effects

benefit of the product grows with user-base i.e. Twitter, Facebook, and other social media. it's harder for newer markets to come in

reputation and goodwill

brand loyalty

switching costs

costs that make customers reluctant to switch to another product or service (impediments that make it costly for customers to switch to buying from another business)

Supply side barriers

economies of scale, learning by doing, research and development, relationships with suppliers

perfect competition graph

elastic

total cost

fixed costs plus variable costs

exiting

getting rid of assets/ equipment/etc

Patents

legal right to profit from ideas (20 years)

Fixed cost examples

loans and rent

variable cost examples

materials and labor

market power graph

more inelastic

imperfect competition structures

oligopoly and monopolistic competition

Perfectly competitive markets

price ceiling reduces ECONOMIC surplus (shortage Q^d > Q^s)

Search goods

products that can be evaluated before purchase and use

Demand side barriers

switching costs, reputation and goodwill, network effects

Market power

the extent to which a seller can charge a higher price without losing many sales to competing businesses

Predatory Pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market (big firms decide to drop prices to eliminate other firms and signal to other firms, no firms can survive to them, then the firm raises its price.)

Bargaining power of buyers

the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other (ie: for cars/ houses)

average cost

the total cost divided by the quantity produced (FC+VC)/Q

Total Revenue (TR)

the total money received from the sale of all goods PxQ

accounting profit

total revenue - explicit costs

average revenue

total revenue divided by the quantity sold

economic profit

total revenue minus explicit and implicit costs

Lobbying

where some businesses can succeed where others cannot (politicians, productive type of investments) Engaging in activities aimed at influencing public officials, especially legislators, and the policies they enact.

relationships with suppliers

· Establishes relationships so there will be better deals and average costs will go down

economies of scale

· Natural monopolies · When quantity is low price is high

Free Entry

- Occurs when there are no factors making a particularly difficult or costly for Business to enter or exit an industry. - This pushes the economic profit down to zero in the long run (effects Perfect Competition and Monopolistic competition)

OLIGOPOLY (imperfect comp)

- Only a handful of large sellers - Goods can be identical or differentiated - IE: cellphone companies, streaming, Coca-Cola, Apple inc., Aircraft manufacturing industry

MONOPOLY

- Only one seller - Many barriers to entry - IE: Utilities by geography (local utility provider LPS/ OPS)

Competitors in other markets

- Potential substitutes can come from unrelated industries - Disruption often comes in the form of a cheaper alternative -Substitutes are a bigger threat when switching costs are low -Complements can point to new opportunities

Existing competitors

- Price competition: competing to win customers by offering lower prices -Nonprice competition: competing to win customers by differentiating your products

Five Forces Framework

- Reveals the underlying source of profitability - Shows the potential threats to profitability

Rational rule for shutting down

- Shut down if profit shut down is > profit price - P<AVC

shutting down

- This stops production (i.e. don't sell ice cream truck stuff during winter) - If the firm shuts down it must still pay fixed costs

Rational rule for entry

- You should enter a market if you expect to earn a positive economic profit - Profit>0 - Price > Average cost

Rational rule for exit

- You should exit the market if you expect to earn negative economic profit - Profit < 0 - Price < Average cost

bargaining power

- ability to negotiate a better deal - is determined by the next best alternative (willingness to pay vs. other person's willingness to accept

persuasive advertising

- doesn't provide any info about product, - "wasteful spending" (rent-seeking)

Hold up problem

- occurs if the other side tries to renegotiate a deal after a relationship-specific investment has been made. *Relationship-specific investment reduces your bargaining power* *write long-term (or mergers) contracts that commit both sides to solve the hold-out problem*

Long-term liability depends on

- the type and intensity of competitive forces - decisions you make in response to these forces

Potential competitors

-Threat of entry depends on the extent to which barriers to entry shield existing businesses from competition by new entrants - This shifts the demand curve left and profits go to zero

Barriers to entry

-business practices or conditions that make it difficult for new firms to enter the market - Impacts a firms ongoing probability

Market Demand

-the quantity demanded across all firms

Firm Demand

-the quantity that buyers demand from an individual firm as it changes its price (demand curve for the firm's product)

Sticky customers can be attracted through product differentiations

1. Features 2. Quality 3. Design/style 4. Reliability 5. Customer service 6. Location/convenience

Problem with Market Power

1. Higher prices 2. Inefficiently smaller quantity (deadweight loss) 3. Larger economic profits (leads to income inequality 4. Inefficient firms with market power can survive 5. Potentially less incentive to innovate

Four Common Structures

1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly

Imperfectly competitive markets

1. less choice = higher prices 2. lowers incentive to reduce quanitity 3. monopolies/oligopolies

marginal revenue

Additional total revenue you get from selling one more unit (change in total revenue/ change in quantity)

Collusion

An agreement to limit competition (multiple companies come together to form this)

Natural Monopoly

- A market in which it is cheapest for a single business to service a market ~Small market size and large fixed cost - Since price < average cost, the supplier would lose money at the optimal price ceiling ~Profit<0 - Solution is to use tax revenue to pay for losses

International Trade

- Can foster competition (increases # of firms/products)

Advertising

- Can help to position you and your product, causing demand to shift out and become more inelastic (less sensitive to price) (shift out and become steeper) *you should only advertise if your product is sufficiently differentiated* *this will only impact market demand not product demand*

PERFECT COMPETITION

- Many buyers and sellers are small relative to the size of the market - All businesses in an industry sell an identical good - "price takers" - There are no barriers to entry/exit over time - IE: commodities, agriculture, a wheat farm

MONOPOLISTIC COMPETITION (imperfect comp)

- Many buyers and sellers selling differentiated products - Product Differentiation: efforts by sellers to make their products different from those of their competitors - Most common Market Structure - No barriers to entry - IE: restaurants, clothing companies, dry cleaning, hotel industry

Firms maximize profit when

Marginal Benefit is equal to Marginal Cost

equal

Marginal Revenue for perfectly competitive firms is ______ to price

below

Marginal revenue lies _____ the demand curve because of the discount effect