Economics: Test 3
Price Taker -
In Perfectly Competitive Market Structures - an individual firm makes up such a small part of the total industry, that it cannot effect the price of the product or service that it sells
From the perspective of the firm, what is the difference between the short run and the long run?
In the short turn, at least one input is fixed, while in the long run all inputs are variable
Economies of scale in production:
Indicate that as a firm expands, its long run per unit costs fall
If a firm is making zero economic profits what should they do?
Stay in business and continue operations
IF there is NO Product Differentiation
Substitutes Perfect Elasticity Horizontal Demand Curve No Control Over Price
Total Costs
Sum of total fixed costs and total variable costs TC = TFC + TVC
Demand curve of an individual firm in a perfectly competitive market is
perfectly elastic
The EU's regulation of genetically modified crops is..
social regulation
A firm will continue to operate in the short run even at an economic loss, given
the P is greater than the minimum AVC
Purpose of Branding
"Differentness" has value for consumers Firms use trademarks, words, symbols, logos A successful brand image contributes to a firm's profitability
The short run break even price for the perfectly competitive firm occurs when P equals
if P = ATC
Monopolistic competition is similar to perfect competition b/c
in both industry structures, there are no barriers to entry
In the long run, monopolistic competitive firm...
make zero economic profits
Perfection Competition is characterized by
many buyers and sellers
Characteristics of a monopolistically competitive market
- differentiated products - many sellers - no barriers to entry
Antitrust Policy
An expressed aim on Antitrust Policy is to foster competition - to prevent collusion among sellers of a product - to prevent against monopolies and monopoly pricing
Define monopolist
Single supplier of a good or service for which there is no close substitute
Economies of Scale Reasons
Specialization Dimensional Factor Improved Productive Equipment Indicate that as a firm expands, its long run per unit costs fall
Production Funtions
Specifies the maximum possible output that can be produced with a given amount of inputs/ maximum total output
Monopolist
- A single supplier of a good or service for which there is no close substitute - The monopolist therefor constitutes the entire industry - In a monopoly market structure, the firm and the industry are one and the same
Price discriminating monopolist
- a monopoly will engage in price discrimination whenever feasible to increase profits - charging different prices to different customers (not discrimination) - the monopolist will sell some of its output at higher prices to consumers with less elastic demand
Exemptions from Antitrust Laws
- all labor unions - public utilities (electric, gas, telephone) - professional baseball - cooperative activities among US exporters - hospitals - public transit and water systems - suppliers of military equipment
Marginal Analysis
Used to determine the profit maximizing rate of production MR = MC
Profit maximizing price-output combination
- look at total revenue and total cost - look at marginal revenues and marginal cost
If a perfectly competitive firm sells the produce for a profit maximizing $4.76 and has ATC of $5.16 in the short run
- this firm must hope the market price rises soon or exit the industry - the firm should shut down if $4.76 is less than the min AVC - the firm is losing money
The decision making process for the perfectly competitive firm boils down to...
... deciding how much to produce
Marginal revenue for a monopolist is...
... downward sloping and always less than the price
When marginal cost is falling...
... marginal product must be rising
When the long run average cost curve is falling...
... the firm is experiencing economies of scale
Average cost pricing by regulated monopolies....
...allows the firm to make a "fair" rate of return
In the short run, if a firm continues to add workers, marginal product must begin to diminish because...
...each worker has less capital to work with
Firms in Perfectly Competitive Market structures are Price Takers
1. Large numbers of buyers and sellers 2. competitors products are perfect substitutes 3. Both buyers and sellers have equal access to info 4. no barriers to entry or exit
Features of Monopolistic Competition
1. Significant number of suppliers 2. Producing similar but not identical products 3. Sales promotion and advertising is used to differentiate products 4. Ease of Entry
Conditions of price discrimination
1. The firm must face a downward sloping D 2. The firm must be able to readily 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
Relevant Market
1. the relevant product market 2. the relevant geographic market
If there are 50 workers who produce 800 chairs, and then there are 51 who produce 925, what is the marginal product of the 51st?
125
Tie-in Sales (illegal) Example
A copier company requires buyers to purchase toner and paper form the company or the warranty is void
Market Share Test
A firm is generally considered to have monopoly power if its percentage share of the "Relevant Market" is 70% or more
Which type of good would advertise with info and persuasion
A pharmaceutical company
Experience Good
A product that an individual must consume before that product's quality can be established
Search Good
A product with characteristics that enable an individual to evaluate that product's quality in advance of a pruchase
Credence Good
A product with qualities that consumers lack the expertise to assess without assistance
AFC Equation
AFC = TFC / Output Q
ATC Equation
ATC = TC / Output Q
A watch manufacturer finds that at 1,000 units of output, its marginal costs are below average total costs. If it produces an additional watch, its average total costs...
ATC Fall
Produce 40,000 units Total costs: $10 mil Fixed Costs: $5 mil AVC?
AVC = $125
AVC Equation
AVC = TVC / Output Q
Mass Marketing
Advertising intended to reach as many customers as possible i.e. radio, TV
Informational Advertising
Advertising that emphasizes transmitting knowledge about the features of a product
Persuasive Advertising
Advertising that is intended to induce a consumer to purchase a particular product and discover a previously unknown taste for an item
Interactive Marketing
Advertising that utilizes information previously obtained online from a customer
Restriction on Prices
Aimed at preventing such industries from earning monopoly profits Allows the form to make a "fair" rate of return (economic profit = $0)
Economic Regulation
Applies to specific industries Regulates prices charged by natural monopolies Certain activities of specific non-monopolistic industries
Natural Monopoly
Arises whenever a single firm can produce all of an industry's output at a lower average cost than other firms Situation where it is more efficient for production to be concentrated in a single firm
Law of Diminishing Marginal Product
At some point, each increase in labor results in smaller increases of output After some point, successive equal-sized increases in a variable factor of production, (labor) will result in smaller increases in output
Monopolistic Demand Curve
B/c a monopoly is the entire industry, the monopoly firm's demand curve is the market demand curve, which is downward slopping
Characteristic of Monopoly
Barriers to entry A product with no close subs A single firm in the market
Firm Obtains a Monopoly
Basically there must be barriers to entry
Long Run Economic Profits
Economic Profits will trend toward zero since so many firms produce substitute, any economic profits will disappear with competition
Sales Promotion and Advertising for a Monopolistic Competitor
Can increase demand for a firm Can further differentiate a firm's product Can increase profits through higher sales
Example of a social reg
Clean water regulations
Fixed Costs
Costs that do not vary with output and are fixed for certain period of time
Variable Costs
Costs that vary with the rate of production (wages)
Gov't Social Regulation
Covers all industries Include various occupational, health, and safety rules that federal and state gov'ts impose on most businesses Aim is to improve the quality of life through - improved products - less pollution - better working conditions
Info and Persuasive Combined
Credence goods, health care, legal advice i.e. pharmaceutical ad
Long Run Average Cost Curve (LAC) Reasons
Economies of Scale Constant returns to scale Dis-economies of scale
Consequence to gov't regulations
Feedback Effect: changing behavior after the regulation that offset the regulation i.e. conform to the law but violate the spirit
Why would economic profits go to $0?
Harder to differentiate products More substitutes
Downward slope of the demand curve of a monopolistic competitive firm implies that the firm
Has some monopoly power over price, and therefore advertising may increase profits
Marginal revenue curve for a perfectly competitive firm is ___ while the marginal revenue curve of the monopolist is ___
Horizontal Downward Sloping
The Demand Curve for a firm's product in a competitive industry
Horizontal line
Dis-economies of Scale
Information and Communication Economies = gains from specialization
Credence Good Example
Legal Advice
Economic Profits
Less : Explicit Costs (rent, salaries, materials) Less : Implicit Costs (opportunity costs) Plus: Revenue
Accounting Profits
Less: Explicit Costs (rent, salaries, materials) Plus: Revenue
Economies of Scale
Low unit costs and prices drive out rivals The largest firm can produce at the lowest ATC
Rate Regulation
Lowers price Increases quantity Minimizes Monopoly profit to $0
Marginal Revenue & Monopoly
MR is always less then the Price To sell more they must lower their price
Average Revenue equals
Market Price
Legal system typically defines monopoly by looking at a firm's
Market Share
Monopolistic Competition
Market structure in which a relatively large number of producers offer similar but differentiated products
Marginal Physical Product (per labor worker)
Measure the rate of increased output from adding each additional worker (Change in Output) (Change in Labor Input)
Social Cost of Monopolies
Monopolists raise the price and restrict production compared to a perfectly competitive environment
IF there IS Product Differentiation
More Control Over Price Demand curve slopes downward Less vulnerable to subtitutes
Asymmetric Information
Occurs when a producer has product information that the consumer lacks
Direct Marketing
Personalized advertising targeted at specific consumers i.e. texts, e-mails,
Capture Hypothesis
Predicts the regulators will eventually be captured by the special interests of the industry being regulates
What is the perfect competitive firm
Price taker - it takes the price given by the market
How do monopolists set price?
Producing the quantity where marginal cost equals marginal revenue and charging the price that corresponds to that quantity
Profits
Profits = (P - ATC) x Q
For a monopolist, RV
RV is less then the price of the product
Perfect Competition
Refers to a market structure in which the decision of individual buyers and sellers have no effect on market price Price is determined by the market
Marginal Cost
Refers to the change in total costs due to a one unit change in output MC = Change in TC / Change in Q
Marginal Physical Product
Refers to the change in total product that occurs when a worker is added to the production process for a given interval
Ease of Entry
Refers to the ease with which competition can enter the market
Long Run
Refers to the period of time in which all factors of production can be varied - long run varies by industry
Short Run
Refers to the period of time in which at least one factor of production is fixed
Physical Product
Refers to the quantity measurements, not dollars
Product Differentiation
Refers to the way a firm distinguishes its products by brand name, color, and other minor attributes High monopolistic competition lowers the firm's price elasticity of demand
Explanation of the share-the-gains and share-the-pain theory
Regulators who are interested in keeping their jobs must please both the industry and the consumers
Price Discrimination
Selling a given product at more than one price, with the difference being unrelated to difference in costs
Marginal Cost
The change in total cost divided by the change in output MC = Change TC / Change Q
Marginal Revenue
The change in total revenue divided by the change in output MR = Change TR / Change Q
What is necessary for a firm to practice price discrimination
The firm must be able to prevent resale of the product
Sherman Antitrust Act of 1980
The first attempt by the federal gov't to control the growth monopolies in the US
Outputs
The goods and services that are produced
Relevant Product Marketing
The key issue is the degree to which products are interchangeable If one is sufficiently substitutable for another, then the two products are considered to be part of the same product
What is a firm's minimum efficient scale
The lowest rate of output at which the firm achieves minimum long run average cost
Minimum Efficient Scale
The lowest rate of output per unit of time at which long run average costs reach a minimum for a particular firm
Short - Run Shutdown Cost
The point at which the price no longer covers average variable costs P < AVC
Monopolization in the US
The possession of monopoly power in the relevant market AND the willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen or historical accident
Short - Run Break - Even Price
The price at which a firm's total revenues equal its total costs P = ATC
Total Revenue
The price per unit times the total quantity sold
Total Revenue
The price per unit times the total quantity sold TR = P x Q P - determined by the market in perfect competition Q - determined by the producer to maximize profit
Primary purpose of economic regulation is
To control the price that regulated enterprises are allowed to charge
Average Total Costs
Total costs divided by the number of units produced
Average Fixed Costs
Total fixed costs divided by the number of units produced
Average Physical Product (output)
Total product divided by the variable input
Average Variable Costs
Total variable costs divided by the number of units produced
Social Regulation
Which covers all industries Broad range of objectives
Inputs
Would include such things as labor and capital
Reason for diseconomies of scale
costs of information and communication
The Sherman Antitrust Act
first legislation enacted to control the creation and growth of monopoly in the US Outlaws Monopolies
Demand curve of the monopolist
is the same as the industry demand curve
In a monopoly market structure, the firm (monopolist)
is the whole industry
Experience goods are goods that consumer...
must consume in order to asses them properly
Monopolist maximizing profits
price must exceed marginal cost
A monopoly industry with identical cost curves wil
produce less and set a higher price
In practice, regulators generally
require firms to set price equal to average cost
In a monopoly...
the firm and the industry are the same thing
Zero economic profit
the firm is covering all of its opportunity costs and will stay in business
The demand curve for the perfect competitor is horizontal b/c
the market dictates each firm's price
Capture Hypothesis
the theory that regulators often end up adopting the views of the regulated
