econ terms for test 2

Which of the following is a characteristic of monopolistic competition?

many small firms

Does the existence of a negative externality result in the market system producing too much or too little of the product compared to what is best for society?

too much

What are the two key characteristics of a public good?

-Non-excludable non payers cannot be prevented from service and non-depletable (or nonrival). -one persons usre of good does not deplete good-prevent someone else from using benfits

What are the characteristics of a monopoly?

-One firm -no close substitutes, strong barriers to entry

Barriers to entry include in monopoly

1. Government Legal Barriers, such as licenses, patents, copyrights.

Barriers to entry include 1-monopoly

1. Government Legal Barriers, such as licenses, patents, copyrights. The government grants a 17-year monopoly to the inventor of a product, in order to encourage technological innovation

Results for Monopolistic Competition:

1.Productive Inefficiency 2.Allocative Inefficiency 3.Does not skew the distribution of income since competition pushes economic profits to zero in the long run.

Oligopoly Results

1.Productive Inefficiency 2.Allocative Inefficiency 3.Increases the skewness to the distribution of income since barriers to entry enable the possibility of economic profits even in the long run.

Monopolistic Competition characteristics

1Many, small firms 2Differentiated products 3Easy entry and exit

Barriers to entry include 2-monopoly

2. Control over a scarce resource. At one point, Alcoa owned most of the aluminum mines around the world

Given a quantity of 1,000, a price of $10, and a total cost of $8,000, calculate total profit.

2000 You can find total revenue by multiplying quantity (1,000) times price ($10), which equals $10,000. We then subtract the total cost of $8,000 to get a profit of $2,000.

Barriers to entry include 3- monopoly

3. High start-up costs. It would be difficult and very expensive, for example, to enter the airplane manufacturing business to compete against Boeing

Give an example. What is a solution for dealing with a positive externality

An example includes education. If left up to individual decision making, we end up with too little of the good. A possible solution is for society to help pay for the good since society gets some of the benefits. (Paying taxes to help pay for part of your Pierce College tuition, would be an example.)

What is an example of a negative externality? What is a solution for dealing with a negative externality?

Examples include carbon emissions that contribute to climate change (coming from the production of energy), cigarettes, and salt/sugar/fat added to foods. Solutions include forcing businesses to pay for all of their costs with taxes, fines, and lawsuits, government regulations, and, in the case of pollution, the government selling pollution permits which can then be bought at sold in markets.

What are the characteristics of oligopoly?

Few firms and barriers to entry. (Normally, whether the products are the same or different is a characteristic in the different industries. However, since there are examples of both types in an oligopoly, this is not an important characteristic when it comes to oligopolies.)

What are three examples of barriers to entry?

Government legal restrictions (licenses, copyrights, patents), control over a scarce resource, high start-up costs, deliberately created entry barriers (advertising, predatory pricing, tying agreements, paying for exclusive rights), technical superiority, economies of scale

GM v Ford

HHI = (19 x 19) + (17 x 17) + (14 x 14) + (11 x 11) + (10 x 10) + (7 x 7) + (5 x 5) + (4 x 4) + (3 x 3) + (3 x 3) = 1175. If GM were to merge with Ford, their total share would be 36. The HHI calculation would then be (36 x 36) + (14 x 14) + (11 x 11) + (10 x 10) + (7 x 7) + (5 x 5) + (4 x 4) + (3 x 3) + (3 x 3) = 1821. Since this number goes above the 1800 threshold, the FTC would most likely not approve the merger.

What is the general solution for dealing with the market failure of public goods?

Have the government provide the good and force people to pay for it with taxes

Barriers to entry include 6 Economies of Scale or Natural Monopolies.-monopoly

In a few cases, the largest firm will end up with the lowest costs per unit and they will naturally take over the market. Examples can occur with utilities. In most cases, the government grants a monopoly but usually regulates the price to insure that the low costs are passed on to consumers in the form of low prices.

are many businesses monopolistically competitive?

Many industries are monopolistically competitive, including fast food restaurants, cereals, and clothing. Be sure not to mix up a monopoly and monopolistic competition.

examples of monopoly

Microsoft and De Beers( controlling most of the computer operations & diamond mining)

What is the problem with leaving the provision of public goods up to the market system? What is the solution?

Problem is that people stop paying for the good since they can obtain the benefits for free. This is a problem for a private business and we end up with the good or service being underproduced or not produced at all. The solution is for the government to provide the good AND to force people to pay for the good through taxes.

monopoly distribution of income

Since a monopolist is charging a higher price than a competitive industry, we end up transferring income from many consumers to a few owners. Thus, monopolies tend to skew the distribution of income—increase the gap between the middle class and the top 1%.

The HHI Index low vs high

The closer the measure is to 0, the more competitive the market. The closer the measure is to 10,000, the less competitive the market. Any number less than 1,000 is considered to be competitive. A number greater than 1800 is considered to be heavily concentrated.

The long run graph for monopolistic competition

any positive economic profits will attract new firms in the long run.

what happens in monopoly?

consumers end up with less stuff at higher prices. Monopolists maintain the higher prices by restricting production.

The short run graph for monopolistic competition

essentially the same as that of a monopoly. However, since there is easy entry for monopolistic competition, unlike monopoly, any positive economic profits will attract new firms in the long run. Thus, economic profits will be competed away in the long run for monopolistic competition.

anti-trust laws

help to promote competition and make certain anti-competitive practices illegal.

One way to distinguish your product from someone else's product (monolpolistic)

is through advertising. Thus, advertising can play a key role in monopolistic competition (as it can with monopolies and oligopolies).

purpose of advertising

is to increase demand for the product as well as to make demand more inelastic—basically to establish brand name loyalty which enables businesses to raise price without losing too many customers.

key difference between monopolistic competition and perfect competition

products are different rather than identical.

The HHI Index

s the sum of the market shares squared. It is used to measure market concentration. The maximum value is 10,000 (if one firm controls the entire market since 100 squared is 10,000). The lowest value in theory would be 0 (which would occur if an infinite number of firms all had equal shares).

There are two ways to find the profit maximizing price and output.

total revenue-total cost look at profit chart

What is a negative externality?

A negative externality is a negative spillover on society that comes from the production and consumption of a good.

What is a positive externality?

A positive externality occurs when the production and consumption of a good results in a positive spillover to society.

On a monopoly graph, how do you find the profit maximizing level of output?

At the intersection of marginal revenue and marginal cost and drop straight down

If the 5 firms in an industry have market shares of 40, 30, 15, 10, and 5, calculate the Hirerfindahl-Hirschman Index.

(40*40) + (30*30) + (15*15) + (10*10) + (5*5) =2850

What are the characteristics of monopolistic competition?

Many small firms, differentiated products, and easy entry.

What is an example of a public good?

National defense, police and fire protection, streetlights.

example of monopoly

OPEC. Before OPEC formed, oil producing countries competed with each other. Production was high and prices were low. Once OPEC formed, countries acted together as a monopoly. They raised oil prices by cutting production. This is bad from society's standpoint. We get less production at higher prices.

If left to markets, does the existence of a negative externality result in overproduction or underproduction? Is the market price too low or too high?

Overproduction—production is too high. On the other hand, the market price is too low because not all the costs have been factored in to the price.

Allocative Inefficiency of monopoly

Price is not equal to marginal cost. The monopolist is restricting production in order to drive up prices. Society would be better off with increased production.

Productive Inefficiency of monopoly

Price is not equal to the minimum of the average total cost curve. The lack of competition means that a monopolist is not being pushed into keeping costs down. On top of that, costs are not being passed on to consumers regardless. We end up with higher costs and higher prices.

Oligopoly Characteristics

1.Few firms 2.Products can be same (oil) or different (cars, soda) 3.Barriers to entry

monopoly characteristics

1.One firm 2.No close substitutes (Budweiser would not be considered to have monopoly power because there are many close substitutes.) 3.Strong barriers to entry.

Barriers to entry include 4

4.Deliberately created entry barriers. One of the main purposes of advertising, for example, is to keep out new entrants. Firms sometimes buy up the competition, as in the case of Starbucks buying up Seattle's Best. Businesses also pay for exclusive rights, such as Coke or Pepsi paying schools around the country to have exclusive rights to sell their products in vending machine. (The $1.70 for Coke at Pierce College is way above the costs of producing that Coke.)

Barriers to entry include 5

5.Technical Superiority. IBM, for example, dominated the business machine market for many years because they had the best people and the best products. Microsoft has argued that their technical superiority explains their market domination rather than any anti-competitive practices.

If quantity is 100 when price is $50, what is total revenue?

5000

What does it mean that monopolies in general produce inefficient results for society?

We have productive inefficiency, which means that a monopolist charges a price above the minimum of average total cost (costs are not low, prices are not low). Monopolists also have allocative inefficiency, which means that price is above marginal cost. This means that a monopolist restricts output. In other words, a monopolist results in higher costs, higher prices, and less production.