Chapter 5 & 6

what is a variable cost?

- a cost that depends on the quantity of output produced

what is a fixed cost?

- a cost that does not depend on the quantity of output

how do producers respond to a shortage?

- shortage tells the producers that they are charging to little for their product -need to increase their price - the higher price decreases the quantity demanded and increases the quantity suppled, eliminating the shortage and steering the market toward equilibrium

how do sellers in a monopolistic competition compete with one another?

- through non price competition -ex: advertising and brand name -designer jeans and regular jeans are the same product but with very different price, in a monopolistic market people want the designer jeans because they want a style and a name; True Religion Jeans vs. Target jeans

what is the relationship between variable costs and output?

- variable cost always rise as the output increases

explain why wal-mart has been accused of causing price wars

- walmart's prices are so low that consumers can't help but buy it -walmart initially suffers and doesn't make a profit because the prices are so low but in the end walmart benefits

How do you calculate the marginal cost?

-Change in Total Cost/Change in Quantity MC= TC 2 - TC 1 ------------------- Q2 - Q1

what is the difference between profit and revenue?

-Profit is revenue left after costs paid Total Revenue -Total Cost= Profit -Revenue: money a firm received for a good or service Total Revenue= Price X Quantity Average Revenue= Total Revenue/Quantity

why is the long run industry supply curve flatter (more elastic) than the short run?

-This is because of entry and exit: a higher price attracts new entrants in the long run, resulting in a rise in industry output and lower price; a fall in price induces existing producer to exit in the long run, generating a fall in industry output and a rise in price -always a balance between price and number new firms entering the market

what is antitrust legislation

-acts designed to monitor and regulate big business, prevent monopolies from forming and dismantle existing monopolies -Examples: The Sherman Antitrust Act of 1890 and the Interstate Commerce Act (ICA) of 1887

how does rationing encourage black markets?

-because its succeeds in distributing goods among consumers, but does not completely satisfy consumers demand

why does the government allow electrical companies to be natural monopolies?

-because of the immense start up equipment and maintenance costs of utilities would be inefficient for one seller to provide

why might a college ration its sports tickets?

-because the number of people wanting to see the game is higher then the amount of tickets they have -and because they also believe that students and alumni should get first priority

what are the barriers to entry for monopolies?

-control of resource: if a firm controls all or most of a scarce resources. it is easy to keep other firms from obtaining it -Technological superiority: firms can gain technological advantage over competitors that can lead to a monopoly - Government involvement: the government can restrict firms from entering a market through patents, copyright laws - Economies of scale: a monopoly can exist if one company has a cost advantage over new firms

what is monopolistic competition?

-differs from perfect competition in one key respect- sellers offer different, rather than identical products -each firm seeks to have monopolylike power by selling a unique product -product variation is much more common than having identical products

in which market structure is entry into the industry the easiest? the hardest?

-easiest: perfect competition -hardest: pure monopoly

What is price floor?

-government regulation that establishes a minimum level for prices

what are inefficiencies caused by price ceiling?

-inefficient allocation: some consumers who want it won't get it -wasted resources:consumers spend extra time trying to find the good that is gone -inefficiently low quality:suppliers will produce a low quality even though consumers want a high quality good -black markets: because there are shortages, the goods will be sold at an increased price

what are the inefficiencies caused by price floors?

-inefficient allocation: suppliers willing to sell at a lower price can't -wasted resources: resources made for the surplus have gone to waste -inefficiently high quality: due to the high prices, suppliers offer high quality good when they want a lower quality good -illegal activity: consumers want lower quality due to surplus, goods will be sold at a lower price illegally

what is rationing?

-is a system in which a government or other institution decides how to distribute a product - under the rationing system, a product is distributed on the basis of policy decision rather than on the basis determined by supply and demand

what are necessary characteristics for perfect competition?

-many buyers and sellers act independently -sellers offer identical products or standardized goods - buyers are well informed about products -sellers can enter or exit the market easily

which type of market structure has one firm?

-monopoly

is the market for jeans an example of perfect competition? Why or why not?

-no because producers and consumers do not have perfect information and jeans are not standardized goods

are there substitutes goods for the type of product in a monopoly?

-no, products are unique and they have no substitutes

which type of market structure(s) has a few firms?

-oligopoly

what are the four most important traits of monopolies?

-one seller: monopolies exist when one firm controls an entire market (or almost all) -no substitutes -high barriers to entry: a monopoly remains the single seller in a market only because he/she can keep other from entering the market -Control over price: a true monopolization can change the price and quantity to how they like

which type of market structure(s) has many firms?

-perfect competition -monopolistic competition

is rent control an example of a price floor or a price ceiling? explain

-price ceiling - set price below equilibrium allows for consumers to get an affordable price that never fluctuates up to drastic rates -ensure that people can get/pay rent on a place

if the government sets a base price for agricultural products, is this a price floor or a price ceiling? Explain

-price floor - with price floor, farmers for example would lose their land and make no profit most likely -able to guarantee farmers a constant level of income

what is the result of a price ceiling?

-shortages and low quality goods that no one wants

What is the result of a price floor?

-surpluses and high quality goods no one wants

technological monopoly? Legal monopoly? Natural monopoly?

-technological monopoly: although firms can enjoy a technological edge in the short run, other firms will soon copy it -legal monopoly:is a monopoly that is protected by law from competition -natural monopoly: exist when one company can produce items cheaper than two competing firms

how do producers responded to a surplus?

-tells producers that they are charging to much - producers need to lower their price in order to still make a profit -the lower price increases the quantity demanded and decreases the quantity supplied, eliminating the surplus and steering the market toward equilibrium

what is market power?

-the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power -The exercise of market power leads to reduced output and loss of economic welfare.

what is the defining characteristic of an oligopoly?

-there are only a few large seller s -sellers offer identical or similar products -other sellers cannot enter the market easily

explain the "unfairness" critique of rationing?

-under the system of rationing, a certain group is favored over the other -while in the system of supply & demand aka the price system, everyone has an equal chance to get the product they want

Average Fixed Cost (AFC)

AFC= Fixed Cost/ Quantity or FC/Q

Average Total Cost (ATC)

ATC= Total Cost/quantity or TC/Q

Average Variable Cost (AVC)

AVC= Variable cost/quantity or VC/Q

what happens to the average fixed cost as output increases?

Average Fixed Cost decreases as the output increases

what is the minimum cost output?

Lowest point on the Average Total Cost (ATC)

where does marginal cost intersect the average total cost?

Marginal Cost always intersects Average Total Cost's minimum point

the firm will make a profit so long as price is higher than what?

The average total cost (ATC)

why might a government allow a legal monopoly? what does it incentivize?

The government creates legal barriers through patents, copyrights, and granting exclusive rights to companies. Example: A copyright gives the creator of an original creative work exclusive rights to it for a limited time. -This provides an incentive for the continued creation of innovative goods. Example: A patent is a limited property right the government gives inventors in exchange for the details of their invention being made public. The government can provide exclusive or special rights to companies that legally allow them to be monopolies.

why might a monopolist restrict output?

a monopolist can increase the price of the good

Where is a price floor relative to the equilibrium price?

above equilibrium

where is a price ceiling relative to the equilibrium price?

below equilibrium

why might some consumers not like price ceilings?

constant shortages and low quality

What is a shortage?

exists when the quantity demanded exceeds the quantity supplied at the price offered

What is a surplus?

exists when the quantity supplied exceeds the quantity demanded at the price offered

what is the relationship between fixed costs and output?

fixed costs stay the same even if the output increases

A single gas station along a lonely road in the desert is an example of what type of monopoly?

geographic monopoly

why might some like price ceilings?

in the case of minimum wage, farmers and workers know the amount of income they will get on a constant basis

what happens to supply when new firms enter?

increase in supplies (shift to the right)

what is perfect competition?

is an ideal market structure in which buyers, consumers, sellers, or producers each compete directly and fully under the laws of supply and demand

what is the marginal cost?

is the change in total cost caused by producing one more unit

profit is at its highest where marginal revenue equals what?

marginal costs

what is a price ceiling?

maximum price sellers are allowed to charge

what is the most common non-competitive market in the United States?

oligopoly- market structure in which a few large sellers control most of the production of a good or service

what happens to price when supply increases?

price continues to fall

is minimum wage an example of a price floor or a price ceiling? explain

price floor because minimum wage is the lowest amount a person can make legally for a job

adding together variable cost and fixed cost finds what?

the Total cost

what best known monopoly was broken up due to the Sherman Antitrust Act?

the standard oil company owned by J D Rockefeller and his associates