Micro ECN Final

Profit =

(P-ATC) x Q

Brand Name

-A brand is a name, term, design, symbol or any other feature that identifies one seller's good or service as distinct from those of other sellers

shifting the supply curve

-A change in something other than price that affects supply causes the entire supply curve to shift. -As the supply curve shifts, the quantity supplied will change, even if the price doesn't change. -The quantity supplied changes at every possible price

Profit maximization in oligopolies

-A given supplier assumes that a price increase will not be matched by its rival, resulting in steep market share losses as its price is not too high, chasing away its customers -At the same time, the same supplier believes that a price reduction will be matched by its rival, resulting in minimal market share gains

Public franchise

-A government designation that a firm is the only legal provider of a good or service is known as a public franchise or a public enterprise

Oligopolies often exist because of barriers to entry....

-Anything that keeps new firms from entering an industry in which firms are earning economic profits -A critical barrier to entry is economies of scale

importance of Advertising for monopolistically competitive firms

-By advertising effectively, firms can increase demand for their products -by differentiate their products: effectively making the demand curve more inelastic -This allows firms to charge a higher price and earn more short-run profit

5 competitive forces that determine the level of competition in the industry (Michael Porter)

-Competition from existing firms -Threat from new entrants -competition from substitute goods and services -Bargaining power of consumers -Bargaining power of suppliers

Demand shifter 6: Change in expectations about future price

-Consumers decide which products to buy, but also when to buy them. -Future products are substitutes for current products -An expected increase in the price tomorrow increases demand today -An expected decrease in the price tomorrow decreases demand today

Suppose demand for your product is relatively price inelastic:

-Customers are not very sensitive to the price of your product -As you increase the price, you expect to only lose a few customers -The small loss in customers does not offset the increase in revenue from the higher prices, so overall revenue goes up.

Suppose demand for your product is relatively price elastic:

-Customers are very sensitive to the price of your product -As you decrease the price, you expect to gain many additional customers -The many additional customers more than compensate for the lost revenue, so overall revenue goes up.

The double whammy

-Demand Curve shifts to the left due to increased competition -Demand Curve becomes more elastic due to more time for consumers to seek out alternatives

Demand shifter 5: Change in population/demographics

-Demographics: The characteristics of a population with respect to age, race, and gender. -Increases in the number of people buying something will increase the amount demanded.

a monopolistically competitive firm should not simply try to maximize revenue because

-Each additional unit of output incurs some marginal cost -Profit maximization requires producing until the marginal revenue from the last unit is just equal to the marginal cost

Benefits of Horizontal Mergers

-Economies of scale/lower costs/higher profits/increased shareholder wealth -Adds Bargaining Power of Customers -Adds Bargaining Power of Suppliers -Larger Market Share -Expanded Base of Potential Customers

Big data:

-Extremely large data sets that may be analyzed computationally to reveal patterns, trends, and associations, especially relating to human behavior and interactions -Firms will use these massive data sets to determine customer preferences and adjust prices accordingly

The reverse double whammy

-Firms will exit the industry, shifting the demand curve for remaining firms to the right -With less firms, there will also be less options, making the demand curve less elastic

4 main barriers to entry for monopolies

-Government control -control of key resource -network externalities -natural monopoly

Government-imposed barriers for oligopolies

-Governments might grant exclusive rights to some industry to one or a small number of firms -Patents -tariffs a quotas on other regions

Benefits of Vertical Mergers:

-Greater control of key resources -Wider distribution -Diversifies Product Offerings -Enhances human talent pool

Our model of monopolistic competition predicts that firms will earn zero profit in the long run, unless...

-Innovate so that their costs are lower than other firms -Convince their customers that their product/experience is better than that of other firms, either by actually making it better in some unique way or making customers perceive that it is better, perhaps through advertising.

Perfect competition

-Many firms -firms sell identical products -No barriers to entry for new firms

Barometric Price Leadership:

-Occurs when one firm declares the change in prices first and then assumes that other organizations will accept it -This firm is not necessarily in a dominant market position but has taken the role of the "signaler"

Low-Cost Price Leadership:

-Occurs when one firm has such an advantageous cost structure that it can be more flexible in adjusting its prices -Again, this firm is not necessarily in a dominant market position but has a stronger ability to reduce prices because its costs are so low (Examples: Walmart)

Dominant Price Leadership:

-One firm has a significantly higher market share than the others, so the smaller firms tend to follow its prices -Where price stability is established by a single firm

Government restriction on monopolies

-Patents, copyrights, and trademarks

Four market structures

-Perfect competition (maximum competition) -Monopoly (Minimum competition) -Oligopoly (small number of firms compete) -Monopolistic competition (large number of firms compete)

Disadvantages of Horizontal Mergers:

-Regulatory Scrutiny -Reduced flexibility -Limited innovation and growth

Disadvantages of Vertical Mergers:

-Regulatory Scrutiny (but less than horizontal) -Corporate culture clash

Economics of scale

-The situation in which a firm's average total cost falls as it increases the quantity of output it produces -This can make it difficult for new firms to enter a market, because new firms usually have to start small and will hence have substantially higher average costs than established firms

Total revenue

-The total amount of funds a seller receives from selling a good or service -calculated by multiplying price per unit by the number of units sold.

Limits of four firm concentration ratio

-They do not include the goods and services that foreign firms export to the United States -They are calculated for national markets, even if the market is local -The definition of the market is tricky: Walmart, Amazon, Costco all compete in multiple categories

monopolists have no competitors and hence no concern about strategic interactions

-They seek to maximize profit by choosing a quantity to produce, just like perfect and monopolistic competitors -they face a downward sloping demand curve -barriers to entry will prevent other firms from competing away their economic profit.

Price effect

-To sell more, the price must decrease, so P is lower. ... The competitive firm can sell all it wants at the given price -after a price increase, each unit sold sells at a higher price, which tends to raise revenue

To identify profit

-Use MC = MR to identify the profit-maximizing quantity -Draw a vertical line at that quantity -The vertical line will hit the demand curve: this is the price -The vertical line will also hit the ATC curve: this is the average cost -The difference between price and average cost is the profit (or loss) per unit -Show the profit or loss with the rectangle with height (P − ATC) and length (Q* − 0), where Q* is the optimal quantity

The monopoly model

-a market structure consisting of a firm that is the only seller of a good or service for which there is not have a close substitute -situations in which firms collude or agree not to compete and act as if they were a monopoly—illegal in the U.S., but still possible

Oligopoly

-a market structure in which a small number of interdependent firms compete -Oligopolists are large and know that their actions have an effect on one another -Barriers to entry exist, preventing firms from competing away profits

Natural monopoly

-a situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms -Natural monopolies are most likely when fixed costs are extremely high

Network externalities

-a situation in which the usefulness of a product increases with the number of consumers who use it

For a firm to be a monopoly their must be...

-barriers to entry preventing other firms coming in and competing with it

Firms are interdependent in that,

-competing firms will not match price increases and will match price drops -Leads to "kinked" demand curve, the MR gap, and sticky prices

Think of the long-run as "the direction of trend";

-demand will continue to fall to the zero (economic) profit level, unless the firm is able to do something about it.

Short run profit for a monopolistically competitive firm

-firm might make a profit or a loss -The situation where the firm is making a profit is attached -quantities for which demand (price) is above ATC; this is what allows the firm to make a profit

first-degree price discrimination (perfect price discrimination)

-refers to charging every consumer a price exactly equal to their willingness to pay for a product -In this case, every consumer would buy the product, but consumer surplus would be zero: the firm would extract all surplus from the market.

Long and short run for monopolies

-there is no distinction between the short run and long run for a monopoly -we expect monopolists to continue to earn profits in the long run

Short run loss for a monopolistically competitive firm

-there is now no quantity for which demand (price) is above ATC; this firm must make a (short-run) economic loss, no matter what quantity it chooses -The Demand curve is below the ATC curve at every quantity

Inputs

-things used in the production of a good or service. -An increase in the price of tires decreases the profitability of selling the car, causing a decrease in supply. -A decrease in the price of steel increases the profitability of selling the good, causing an increase in supply.

Price discrimination is possible when:

1. Firms possess market power Otherwise, the firm is a price-taker, i.e., Perfectly Competitive with a perfectly elastic demand curve 2. Identifiable groups of consumers have different willingness to pay for the product If the firm cannot identify different groups, it cannot expect to charge those groups different prices 3. Reselling the product at a higher price than you bought it for is difficult or not possible. This is called arbitrage Either because reselling the product is not logically possible (a service, like a haircut, for example) or because the transaction costs involved make resale impractical

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied

technological change

A firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs

Law of supply

A rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied

Marketing

All the activities necessary for a firm to sell a product to a consumer

Collusion:

An agreement among firms to charge the same price or otherwise not to compete

Demand Shifter 1 (INCOME)

Changes in income will cause a shift in the demand curve. Key Caveat: income and demand shift in the same direction only if the product is normal.

Price stickiness

Costs can rise or fall within this gap with no change in prices or quantity

Complementary items

Goods and services that are used together

Substitutes

Goods and services that can be used for the same purpose

Law of Demand

Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Demand shifter 4: Change in consumer preferences

If consumers' tastes change, they may buy more or less of the product.

change in consumer preference

If consumers' tastes change, they may buy more or less of the product.

Antitrust laws:

Laws aimed at eliminating collusion and promoting competition among firms

In the long run, demand becomes...

More elastic

Profit Maximizing Quantity in Perfectly Competitive Market

P = MR = MC

Monopolistic competition results in neither _________ nor__________ efficiency

Productive, Allocative

Dominant Theory of Prisoner's Dilemma

Select the optimal strategy for yourself and do not consider what the other prisoner will do

Brand management

The actions of a firm intended to maintain the differentiation of a product over time

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price

Perfectly inelastic demand:

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

Substitution effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on a consumers' purchasing power, holding all other factors constant.

Monopolistic competition

a market structure in which" -Many firms compete - firms DO NOT sell identical products -barriers to entry are low we expect monopolistically competitive firms to have zero long-run profit but not to face a horizontal demand curve

Market equilibrium

a situation in which quantity demanded equals quantity supplied

For any firm with a downward-sloping demand curve, its marginal revenue curve must be:

below its demand curve

Price Discrimination:

charging different prices to different customers for the same good or service when the price differences are not due to differences in costs

Control of key resources

example: For many years, the Aluminum Company of America (A l c o a) either owned or had long-term contracts for almost all the world's supply of bauxite, the mineral from which we obtain aluminum

he demand curve in the long run is ___________than in the short run

flatter

Four-Firm Concentration Ratio

four-firms concentration ratio that is larger than 40 percent of the market tends to indicate an oligopoly

downward-sloping demand curve (for bud light seltzer)

if Budweiser raises its Bud Light Seltzer price, some but not all of its customers will switch to buying another hard seltzer brand

Demand is inelastic if...

if its price elasticity of demand is smaller (in absolute value) than 1.

demand is elastic if...

its price elasticity of demand is larger (in absolute value) than 1.

we often refer to "more negative" elasticities as being ______ or ______

larger or higher

output effect (of the price reduction)

more output is sold, so Q is higher, which tends to increase total revenue

Second degree price discrimination (Indirect Price Discrimination)

occurs when a company charges a different price for different quantities consumed or when the purchase occurs (bulk discounts, 2 for the price of one)

Third degree price discrimination (Direct Price Discrimination)

occurs when a company charges a different price to different consumer groups ("Ladies night")

Demand shifter 3: change in price of complementary items

price of complementary goods goes up so some people might not want either good

Allocative efficiency

refers to producing all goods up to the point where the marginal benefit to consumers is just equal to the marginal cost to firms

Productive efficiency

refers to producing items at the lowest possible cost

The output effect is equal to the price;

so marginal revenue is lower than the price

What explains the law of demand?

substitues effect and income effect

Demand shifter 2: change in the price of substitute items

substitute items may become cheaper and drive more customers to it

market supply

the decisions of firms about how much of a product to provide at various prices.

Since price and quantity change in opposite directions...

the demand curve, the price elasticity of demand is a negative number

Demand is unit-elastic if

the price elasticity of demand is exactly equal to 1.

Concentration ratio

the ratio of the combined market shares of a given number of firms to the whole market size -indicates the size of firms in relation to their industry as a whole

price elasticity of demand

the responsiveness of the quantity demanded to a change in price

A firm makes a profit when...

total revenue is greater than total cost

Vertical mergers:

when firms at different stages of the production process consolidate -eBay merged with PayPal in 2002 -Disney merged with Pixar in 2006 -Ikea merged with a Polish forestry firm in 2019

Horizontal mergers:

when firms in the same industry consolidate -Petroleum giants Exxon and Mobile merged in 1998 -Airlines US Air and American merged in 2015 -Beer companies Anheuser Busch and InBev merged in 2008