Micro final notes

Shifts in supply: determinants that shift the supply in a market and the direction of the shift

Supply curve shift: Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price. The ceteris paribus assumption: Supply curves relate prices and quantities supplied assuming no other factors change. "other things being equal". Factors that affect supply: Natural conditions, new technology, government policies,

Production costs:explicit costs

An explicit cost is an expense that has occurred and has a clearly defined dollar amount. These expenses are incurred during business operations and are actual out-of-pocket cash outlays. The objective dollar amounts are subject to reporting. Explicit costs arise based on what has actually been purchased Examples:Net income of a business reflects residual income remaining after all explicit costs have been paid. Explicit costs are the only costs necessary to calculate accounting profit. Expenses relating to advertising, supplies, utilities, inventory and equipment actually purchased are examples of explicit costs. Although the depreciation of an asset is not an activity that can be tangibly traced, depreciation expense is an explicit cost because it relates to the cost of the underlying asset that the company owns. Read more: Explicit Cost https://www.investopedia.com/terms/e/explicitcost.asp#ixzz51A0LIlMe Follow us: Investopedia on Facebook

Reasons for exporting and importing

An export is the sale of goods to a foreign country, while an import is the purchase of foreign manufactured goods in the buyer's domestic market. Why? Exporting and importing helps grow national economies and expands the global market. Every country is endowed with certain advantages in resources and skills. Imports are important for businesses and individual consumers. If you import more than you export, more money is leaving the country than is coming in through export sales. the more a country exports, the more domestic economic activity is occurring. More exports means more production, jobs and revenue. If a country is a net exporter, its gross domestic product increases, which is the total value of the finished goods and services it produces in a given period of time. In other words, net exports increase the wealth of a country.

Asymmetric information

Asymmetric information, sometimes referred to as information failure, is present whenever one party to an economic transaction possesses greater material knowledge than the other party. This normally manifests itself when the seller of a good or service has greater knowledge than the buyer, although the opposite is possible. Almost all economic transactions involve information asymmetries. Read more: Asymmetric Information https://www.investopedia.com/terms/a/asymmetricinformation.asp#ixzz51AE7f2ym Follow us: Investopedia on Facebook

Price-elasticity of demand: difference between elastic and inelastic

Elastic demand means with a change in its price, quantity demanded will change, mostly in negative direction (if price increases, demand falls). Inelastic demand is when price change has no effect on the quantity demanded.

Oligopoly: Game theory

Game theory looks at different possible outcomes of oligopoly - depending on how firms react to different decisions -If the firms in oligopoly seek to increase market share the most likely outcome is that they both set low prices and make a low profit -However if the firms could come to some agreement either formal or tacit collusion - they could both agree to raise prices. This will require the firms to reduce output and stick to the more limited supply. If they set high prices, then they will both be able to make monopoly profits -when prices are high, there is a temptation to undercut your rival and benefit from both high market prices and high output. This enables higher profit but if firms start to cheat - then rivals are likely to retaliate by cutting prices too.

There is free entry in monopolistic competition and in perfect competition.

Hard to stay in

Wages and income distribution.

Income distribution is the smoothness or equality with which income is dealt out among members of a society. If everyone earns exactly the same amount of money, then the income distribution is perfectly equal. ... Usually, however, a society's income distribution falls somewhere in the middle between equal and unequal. income distribution is how a nation's total GDP is distributed amongst its population.

Comparing monopoly and monopolistic competition.

Monopoly refers to a market structure where there is a single seller dominates the whole market by selling his unique product. Monopolistic competition refers to the competitive market, wherein few sellers in the market offer near substitutes to the customers.

Oligopoly: Mutual interdependence.

Mutual interdependence exists within an oligopoly industry because each of the oligopolists has a sizable part of the market. As a consequence, when it changes its sales, its prices, or its marketing strategies, this oligopoly firm will likely affect the sales of other firms within the industry.

Opportunity cost.

Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that is necessarily passed up.

A perfectly competitive seller is a price-taker because it takes the price given by the market.

Price taker- A buyer or seller that is unable to affect the market price A buyer or seller that takes the market price given, a buyer or seller unable to affect the market price

equilibrium

Supply and demand curves intersect at the equilibrium price. This is the price at which the market will operate.

Supply

is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.

When the government taxes firms that pollute, firms will be able to produce less because the costs of production are higher.

less likely to pollute

Monopolies charge a higher price a produce a lower quantity than perfect competition.

they are the only ones selling

Production costs marginal costs.

• The marginal product of labor is the additional output (i.e. the extra number of cookies) produced when one more worker is hired in the firm.

Production costs: average costs

average cost and/or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q). Average costs may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand.

Law of diminishing marginal returns.

economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.

Patents encourage innovation but they create monopolies

patent- a grant by the federal government giving an inventor the exclusive right to develop, use, and sell an invention for a set period of time People had the guarantee that their own inventions were protected and because new discoveries were made, new products were available.

The marginal rule (MR=MC) to maximize profit applies to firms in any market structure.

(marginal revenue=marginal cost) profit maximization occurs at the most significant gap or the biggest difference between the total revenue and the total cost. At A, Marginal Cost < Marginal Revenue, then for each extra unit produced, revenue will be higher than the cost so that you will generate more. At B, Marginal Cost > Marginal Revenue, then for each extra unit produced, the cost will be higher than revenue so that you will create less. Thus, optimal quantity produced should be at MC = MR

Production costs:fixed costs

- Fixed costs Fixed costs do not immediately change with the level of output. They only change when the output significantly increases.

Tariffs.

-A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. -A specific tariff is levied as a fixed fee based on the type of item (e.g., $1,000 on any car). -An ad-valorem tariff is levied based on the item's value (e.g., 10% of the car's value). -Tariffs provide additional revenue for governments and domestic producers at the expense of consumers and foreign producers. They are one of several tools available to shape trade policy.

Comparative advantage.

-Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors -One of the most important concepts in economic theory, comparative advantage lays out the case that all actors, at all times, can mutually benefit from cooperation and voluntary trade. It is also a foundational principle in the theory of international trade.

International trade.

-International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us. -International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events.

Monopoly: Price discrimination.

-Price discrimination: in a monopoly the firm can change the price and quantity of the good or service. In an elastic market the firm will sell a high quantity of the good if the price is less. If the price is high, the firm will sell a reduced quantity in an elastic market. Price discrimination is a pricing strategy that charges customers different prices for the same product or service

Characteristics of monopolistic competition

-There are many producers and many consumers in the market, and no business has total control over the market price. -Consumers perceive that there are non-price differences among the competitors' products. -There are few barriers to entry and exit. -Producers have a degree of control over price.

Inefficiencies and benefits of monopolistic competition.

-have products that are highly differentiated, meaning that there is a perception that the goods are different for reasons other than price; -have many firms providing the good or service; -firms can freely enter and exits in the long-run; -firms can make decisions independently; -there is some degree of market power, meaning producers have some control over price; and -buyers and sellers have imperfect information. The first source of inefficiency is due to the fact that at its optimum output, the firm charges a price that exceeds marginal costs. The monopolistic competitive firm maximizes profits where marginal revenue equals marginal cost. A monopolistic competitive firm's demand curve is downward sloping, which means it will charge a price that exceeds marginal costs. The market power possessed by a monopolistic competitive firm means that at its profit maximizing level of production there will be a net loss of consumer and producer surplus. The second source of inefficiency is the fact that these firms operate with excess capacity. The firm's profit maximizing output is less than the output associated with minimum average cost. All firms, regardless of the type of market it operates in, will produce to a point where demand or price equals average cost. In a perfectly competitive market, this occurs where the perfectly elastic demand curve equals minimum average cost. In a monopolistic competitive market, the demand curve is downward sloping. In the long run, this leads to excess capacity.

Characteristics of oligopoly

-small number of firms -identical products, like perfect competition in this regard, while others produce differentiated products, more like monopolistic competition. -Firms in an oligopolistic industry attain and retain market control through barriers to entry. The most noted entry barriers are: (1) exclusive resource ownership, (2) patents and copyrights, (3) other government restrictions, and (4) high start-up cost.

Characteristics of monopoly.

A monopoly can be recognized by certain characteristics that set it aside from the other market structures: -Profit maximizer: a monopoly maximizes profits. Due to the lack of competition a firm can charge a set price above what would be charged in a competitive market, thereby maximizing its revenue. -Price maker: the monopoly decides the price of the good or product being sold. The price is set by determining the quantity in order to demand the price desired by the firm (maximizes revenue). High barriers to entry: other sellers are unable to enter the market of the monopoly. -Single seller: in a monopoly one seller produces all of the output for a good or service. The entire market is served by a single firm. For practical purposes the firm is the same as the industry. -Price discrimination: in a monopoly the firm can change the price and quantity of the good or service. In an elastic market the firm will sell a high quantity of the good if the price is less. If the price is high, the firm will sell a reduced quantity in an elastic market.

Accounting profit

Accounting profit is the difference between total monetary revenue and total monetary costs, and is computed by using generally accepted accounting principles (GAAP). Put another way, accounting profit is the same as bookkeeping costs and consists of credits and debits on a firm's balance sheet. These consist of the explicit costs a firm has to maintain production (for example, wages, rent, and material costs). The monetary revenue is what a firm receives after selling its product in the market. Accounting profit is also limited in its time scope; generally, accounting profit only considers the costs and revenue of a single period of time, such as a fiscal quarter or year.

adverse selection

Adverse selection refers to a situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality. In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance. To fight adverse selection, insurance companies try to reduce exposure to large claims by limiting coverage or raising premiums. Adverse selection occurs when one party in a negotiation has relevant information the other party lacks. The asymmetry of information often leads to making bad decisions, such as doing more business with less-profitable or riskier market segments.

Monopolies can earn extraordinary profits in the long-run because of barriers of entry.

Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.

Shifts in demand: determinants that shift the demand in a market and the direction of the shift.

Changes in factors like average income and preferences can cause an entire demand curve to shift right or left. This causes a higher or lower quantity to be demanded at a given price.That suggests at least two factors in addition to price that affect demand. Willingness to purchase suggests a desire, based on what economists call tastes and preferences. If you neither need nor want something, you will not buy it. Ability to purchase suggests that income is important. Professors are usually able to afford better housing and transportation than students because they have more income. Prices of related goods can affect demand also. If you need a new car, the price of a Honda may affect your demand for a Ford. Finally, the size or composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula. Ceteris paribus assumption. Demand curves relate the prices and quantities demanded assuming no other factors change. This is called the ceteris paribus assumption. This article talks about what happens when other factors aren't held constant.

Oligopoly: Rivalry, collusion, and temptation to cheat.

Collusion is possible in oligopoly, but it depends on several factors. Collusion is more likely if 1. There are a small number of firms, who are well known to each other - this makes it easier to stick to output quotas 2. A dominant firm, who is able to have a lot of influence in setting the price. 3. Barriers to entry, this is important to stop other firms entering to take advantage of the high profits 4. Effective communication and monitoring of output and costs 5. Similar production costs and therefore will want to raise prices at the same rate 6. Effective punishment strategies for firms who cheat 7. No effective government legislation, e.g. collusion is illegal in the UK.

economic profit.

Economic profit or loss is most useful when comparing multiple outcomes and making a decision between these outcomes. This is especially true for decisions with multiple variables that affect and do not affect accounting profit. For instance, one decision may result in a higher accounting profit, but after other variables are considered, the economic profit of another decision may be higher. An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs, and as a result, a person can have a significant accounting profit with little to no economic profit.

Economies of scale.

Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. Economies of scale can be classified into two main types: Internal - arising from within the company; and External - arising from extraneous factors such as industry size.

relationship of price elasticity of demand and total revenue.

If the demand for the good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case the two effects off-set each other. When demand is elastic, the quantity effect dominates the price effect; so a decrease in the price increases total revenue.

Imperfect information.

Imperfect information is a situation in which the parties to a transaction have different information, as when the seller of a used car has more information about its quality than the buyer. Sellers often have better information about a good than buyers because they are more familiar with it. They know more about its quality, durability, and other features. Buyers, in contrast, have limited contact with the commodity and thus have less information.

Production costs: implicit

Implicit costs • There are many kinds of implicit costs in a firm. • They can all be grouped under the concept of opportunity costs. • For example, the owner of a business may run an errand for the firm using his own car. • He will not necessarily take money from the business for his labor or for the use of his car. • He would have earned money if he had run that errand for another business. • This is an implicit cost.

Comparing monopoly and perfect competition.

In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient.

Oligopoly: the Nash equilibrium.

In game theory, the Nash equilibrium, named after American mathematician John Forbes Nash Jr., is a solution concept of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his own strategy.[1] If each player has chosen a strategy and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitutes a Nash equilibrium. The Nash equilibrium is one of the foundational concepts in game theory. The reality of the Nash equilibrium of a game can be tested using experimental economics methods.

Price ceilings and its impact in the market (shortage)

Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium price. When the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers won't produce as much at the lower price, while consumers will demand more because the goods are cheaper. Demand will outstrip supply, so there will be a lot of people who want to buy at this lower price but can't

How the single-price monopoly makes the decision to maximize profit (numerical and graphical examples).

In traditional economics, the goal of a firm is to maximize their profits. This means they want to maximize the difference between their earnings, i.e. revenue, and their spending, i.e. costs. To find the profit maximizing point, firms look at marginal revenue (MR) - the total additional revenue from selling one additional unit of output - and the marginal cost (MC) - the total additional cost of producing one additional unit of output. When the marginal revenue of selling a good is greater than the marginal cost of producing it, firms are making a profit on that product. This leads directly into the marginal decision rule, which dictates that a given good should continue to be produced if the marginal revenue of one unit is greater than its marginal cost. Therefore, the maximizing solution involves setting marginal revenue equal to marginal cost.

Comparing perfect competition and monopolistic competition.

Monopolistic -there is only one firm that dictates the price and supply levels of goods and services and has total market control -prices are generally high for goods and services because firms have total control of the market -Firms have total market share, which creates difficult entry and exit points -involves a single seller, and buyers do not have a choice of where to purchase their goods or services. Perfect -comprised of many firms, where no one firm has market control. -prices are dictated by supply and demand. -Firms in a perfectly competitive market are all price takers because no one firm has total market control. -have a small market share. -Barriers to entry are relatively low and allow firms to enter and exit easily. -many buyers and sellers, and consumers are able to choose where they buy their goods and services.

moral hazard

Moral hazard is the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles. Moral hazards can be present any time two parties come into agreement with one another. Each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement.

Difference between public goods and private goods.

Public -non rival (that my consumption does not affect your consumption of a good) -non excludable (that I cannot prevent you from consuming a good) Private -rival -excludable - product that must be purchased to be consumed, and its consumption by one individual prevents another individual from consuming it.

The Herfindahl-Hirschman Index

The Herfindahl-Hirschman index (HHI) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers, and can range from close to zero to 10,000. The U.S. Department of Justice uses the HHI for evaluating potential mergers issues.

Antitrust policies.

The Sherman Antitrust Act of 1890 was the first antitrust law in the United States and continues to be the centerpiece of U.S. antitrust policy. It was passed during a time when mergers in many important industries were producing large firms that dominated their markets, causing concern about market power. These large firms were called trusts—hence the name antitrust policy. The Clayton Antitrust Act of 1914 covers mergers, among other things. The Federal Trade Commission Act set up the Federal Trade Commission (FTC), which helps to enforce the antitrust laws. The Antitrust Division of the Justice Department also shares responsibility for enforcing the antitrust laws.

Labor supply and labor demand.

The firm's demand for labor. The firm's demand for labor is a derived demand; it is derived from the demand for the firm's output. If demand for the firm's output increases, the firm will demand more labor and will hire more workers. If demand for the firm's output falls, the firm will demand less labor and will reduce its work force. An individual's supply of labor. An individual's supply of labor depends on his or her preferences for two types of "goods": consumption goods and leisure. Consumption goods include all the goods that can be purchased with the income that an individual earns from working. Leisure is the good that individuals consume when they are not working. By working more (supplying more labor), an individual reduces his or her consumption of leisure but is able to increase his or her purchases of consumption goods.

Market failure and the free-rider problem.

The free rider problem is a market failure that occurs when people take advantage of being able to use a common resource, or collective good, without paying for it, as is the case when citizens of a country utilize public goods without paying their fair share in taxes. The free rider problem only arises in a market in which supply is not diminished by the number of people consuming it and consumption cannot be restricted. Goods and services such as national defense, metropolitan police presence, flood control systems, access to clean water, sanitation infrastructure, libraries and public broadcasting services are able to be obtained through free riding.

Labor markets.

The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. It is a major component of any economy, and is intricately tied in with markets for capital, goods and services. At the macroeconomic level, supply and demand are influenced by domestic and international market dynamics, as well as factors such as immigration, the age of the population, and education levels. Relevant measures include unemployment, productivity, participation rates, total income and GDP.

demand

The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded. Demand curves and demand schedules are tools used to summarize the relationship between quantity demanded and price.

how to interpret price elasticity of demand

The law of demand states that there is an inverse relationship between price and demand for a good. As a result, the PED coefficient is almost always negative. The price elasticity of demand (PED) is a measure that captures the responsiveness of a good's quantity demanded to a change in its price. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand are held constant.

How the firm in monopolistic competition makes the decision to maximize profit (graphical examples)

The monopolistically competitive firm decides on its profit-maximizing quantity and price in much the same way as a monopolist. A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve, and so it will choose some combination of price and quantity along its perceived demand curve.

Basic market model

There are 4 basic market models: pure competition, monopolistic competition, oligopoly, and pure monopoly. Perfect competition: Perfect competition happens when numerous small firms compete against each other. Firms in a competitive industry produce the socially optimal output level at the minimum possible cost per unit. Monopoly: A monopoly is a firm that has no competitors in its industry. It reduces output to drive up prices and increase profits. By doing so, it produces less than the socially optimal output level and produces at higher costs than competitive firms. Oligopoly: An oligopoly is an industry with only a few firms. If they collude, they reduce output and drive up profits the way a monopoly does. However, because of strong incentives to cheat on collusive agreements, oligopoly firms often end up competing against each other. Monopolistic competition: In monopolistic competition, an industry contains many competing firms, each of which has a similar but at least slightly different product. Restaurants, for example, all serve food but of different types and in different locations. Production costs are above what could be achieved if all the firms sold identical products, but consumers benefit from the variety.

How shifts in supply and shifts in demand change the equilibrium price and the equilibrium quantity.

There is a four-step process that allows us to predict how an event will affect the equilibrium price and quantity using the supply and demand framework. Step one of this process is to draw a demand and supply model representing the situation before the economic event took place. Step two of this process is to decide whether the economic event being analyzed affects demand or supply. Step three of this process is to decide whether the effect on demand or supply causes the curve to shift to the right or to the left and to sketch the new demand or supply curve on the diagram. Step four of this process is to identify the new equilibrium and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.

Reasons for a monopoly to arise.

WHY MONOPOLIES ARISE • Barriers to entry have three sources: - A single firms owns a key resource (ie- DeBeers Diamond Monopoly). - The government gives a single firm the exclusive right to produce some good (ie- Network Solutions). - Costs of production make a single producer more efficient than a large number of producers, basically a natural monopoly (ie- Cable TV). • A natural monopoly arises when there are economies of scale over the relevant range of output

long-run.

What is the 'Long Run' A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas in the short run firms are only able to influence prices through adjustments made to production levels. Additionally, whereas firms may be a monopoly in the short-term they may expect competition in the long-term. In economics, long-run models may shift away from short-turn equilibriums, in which supply and demand react to price levels with more flexibility. Firms examining the long run understand that they cannot alter levels of production in order to reach an equilibrium between supply and demand. In the long run, they can either expand or reduce production capacity or enter or exit an industry based on expected profits. In the short run, barriers to entry prevent competitors from quickly entering a market. In the long run, however, competitors may enter or exit an industry depending on the levels of profit previously seen by companies operating in that industry. Read more: Long Run https://www.investopedia.com/terms/l/longrun.asp#ixzz51A3w4Lka Follow us: Investopedia on Facebook

Short-run

What is the 'Short Run' The short run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied. A key principle guiding the concept of short run and long run is that in the short run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. This constraint differs from the long run, which is considered to contain only fixed costs. In the short run, leases, contracts and wage agreements limit a firm's ability to adjust production or wages in order to maintain a rate of profit. If a hospital experiences lower than expected demand in a given year, but its entire employment force of doctors, nurses and technicians is under contract for the duration of the year, then the hospital has no choice but to swallow a cut in its profit. In the long run, firms in capital-intensive industries, such as oil and mining, have time to expand or shrink operations in factories or investments in correspondence with changing demand, but in the short run, they are unable to capitalize on changes in demand with the same degree of flexibility.

Controlling market power.

the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers" or "price setters", while those without are sometimes called "price takers". Significant market power occurs when prices exceed marginal cost and long run average cost, so the firm makes profit.