Micro Econ- Test 3
opportunity cost in labor markets
"or what" you could hire another person, or you could keep cost and production at current levels
in nash equilibrium there are 2 things...
1. best response 2. correct response (the equilibrium outcome is not always the best response)
how to plot marginal revenue
1. calculate total revenue (= PxQ) 2. asses marginal revenue (change in total revenue from selling one more unit) 3. plot results
3 solutions to solving coordination problems
1. communication 2. focal points, culture, and norms 3. laws and regulations
four steps to making a good strategic decisions
1. consider all possible outcomes 2. think about the "what ifs" serparatly 3. evaluate your best response 4. put yourself in someone else's shoes
5 insights to imperfect competition
1. having more competitors leads to less market power 2. market power allows you to pursue independence pricing strategies 3. successful product differentiation gives you more marker power 4. imperfect competition among buyers gives them barganing power 5. your best choice depends on the actions of other businesses
barriers to entry
Obstacles that make it difficult for new firms to enter a market
focal point
a cue form outside the game that helps you coordinate on a specific equilibrium (e.g. lunch is at 12pm if not specified)
income effect
a higher wage increase in your income leads you to choose more leisure and hence, less work (labor demand curve in downward sloping)
substitution effect in labor supply
a higher wage increases the returns to work relative to leisure, leading you to work more (labor demand curve is upward sloping)
natural monopoly
a market in which it is cheapest for a single business to service the market
prune tree method
a method for solving game trees: Start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose—the "dead leaves"—off your game tree.
play off table
a table that isn't your choice in each row, the other player's choices in each column, and shows you all possible outcomes... listing the playoffs in each cell
economic profit =
accounting profit - implicit costs
explicit cost
actual cash payments
simultaneous games
all players make their choices without knowing what choice the other has made
what does game tree show?
all possible outcomes can play out overtime
collusion
an agreement by rivals to limit competition between each other
Nash Equilibrium
an equilibrium in which the choice that each player makes is a best response to the choices other players are making
switching cost
an impediment that makes it costly for customers to switch to buying another business
marginal principle for labor supply
asking the question "how many hours should i work" and "should i work one more hour"
backwards bending supply curve
at higher prices the income effect dominates, but at lower prices the substitution effect dominates
underproduction problem
business with more marker power supply less than the efficient quantity
price taker
buyers or sellers who take market price as given and charging the market price
average cost
calculated as your firm's total cost (including fixed & variable), or cost per unit manufactured
if a monopolistic produces a quantity that generates MC<MR then profit...
can be increased by increasing outputs
marginal cost
change in the total cost (or VC) when you produce another item
shift in demand curve happens when
changes in demand of your product
first mover advantage occurs when you...
commit to being aggressive
supply-sided strategies include...
cost advantages, better supplier relations, and limiting access to key inputs for other competitors
implicit cost
cost that affect decisions but no money charges (opportunity cost)
when non-wage cost rise, then the labor demand will...
decrease with any given wage (left shift in labor demand curve)
entry into markets
decreases your demand, shifts left, and you lose market power
4 types of barriers to entry
demand-sided, supply-sided, regulatory, and deterrence strategies
what does a firm's demand curve show?
determines market power and summarizes your marginal revenue curve
free entry pushes prices _______ toward _______
down, average cost
labor demand is
downward sloping because of diminishing marginal product
average fixed cost graph
downward sloping because of the spreading effect
improves management/ technology changes that increase the production of labor means...
each worker can produce more per week
if there is free entry or exit then in the long run...
economic profits will be eliminated and price will equal average cost (economic profit = $0)
product differentiation
efforts by sellers to make their products differ from their competitors. this can add market power
rational rule for entry
enter a new market if you expect to earn a positive economic profit, which occurs when the price > average cost (AC)
average revenue
equal to the price, if you charge everyone the same price
rational rule for exit
exit a market if you expect to earn a negative economic profit, which occurs if the price < average cost (AC)
oligopoly characteristics
few competitors and same or differentiated products
moving second can be an advantage when...
flexibility is important
patent
gives an inventor the right to be the only seller of the good they invented for a period of time
average variable cost graph
goes down and then up in a u-shape
if each additional worker is generating more revenue for you, then you should...?
higher more workers
substitution effect says that...
higher wages make work relatively more attractive
the income effect says that...
higher wages makes leisure more attractive
rational rule for employers
hire one more worker if that extra worker's marginal revenue product is greater than (or equal to) the wage
cost-benefit in labor markets
hire one more worker only if that extra worker yields a higher marginal benefit than marginal cost
firm demand curve
illustrates how to quantity that buyers demand from an individual business or firm values as it changed the price it changes
look forward
in games that play out over time, you should look forward to anticipate the likely consequences of your choices
exit from markets
increase your demand, shifts right, and you gain market power
when income and substitution effect offset each other
its a vertical line
wage is the principle of...
labor (vertical axis)
competition policy
laws and regulations designed to ensure that markets remain competitive
competition policy (antitrust policy)
laws and regulations designed to ensure that markets remain competitive.
perfectly competitive labor market
lots of businesses looking to hire from a pool of many workers with similar skills
monopolistic competition characteristics
many competitors and differentiated products
perfect competition characteristics
many competitors and few products
marginal revenue product=
marginal product of labor x price
marginal benefit of labor=
marginal revenue product (marginal product of labor x price)
maximize your profits when
marginal revenue product = wage
average cost determines profitability of the....
marginal supplier
oligopoly
market with few large sellers
imperfect competition
markets featuring few competitors, but with sufficiently limited competition that sellers still have market power
monopolistic competition
markets with many small businesses competing, each selling differentiated products
why are mergers not beneficial?
may lessen competition or tend to create a monopoly
marginal revenue product
measure the marginal revenue from hiring an additional worker
profit margin
measures your profit per unit sold
scale effect requires...
more workers and increasing production and labor demand
monoploy characteristics
no competitors and unique products
perfect competition has...
no market power
marginal revenue =
output effect (P) - discount effect (∆P x Q)
regulatory strategies include...
patents, regulations to entry, government license, and business lobbying to create new regulatory barriers
market power in order (least to greatest)
perfect competition, monopolistic competition, oligopoly, and monopoly
short-run
period of time in which the production capacity and the number/type of competitors you face cannot change
long-run
period of time in which you, or your rivals, may expand or contract production capacity, and new rivals may enter or exit
sequential games
players make decisions one after another, so one player responds to the known decisions of other players
positive for consumers to merger laws
positive: mergers might create cost savings and eventually feed into lower prices
profit margin =
price - average cost
in perfect competition one must be a...
price takers
checkmark method
putting a checkmark next to each player's best response on the play off table to find the nash equilibrium
hours of work measures the...
quantity of labor (horizontal axis)
changes in price of capital
scale effect, substitution effect, better management/production gains, and non-wage benefits (subsidies and taxes)
preditory pricing
selling a product below cost to drive competitors out of the market
marginal principle in labor markets
should you hire one more worker?
game tree
shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes
reason backwards
start by analyzing your last period of the game. use this to figure out what will happen in the second-to-last choice and keep reasoning backwards until you can see all the consequences that follow from today's decision
the prisoner's dilemma is a....
striking counterpoint to the idea that free markets deliver the best outcomes
demand-sided strategies include...
switching cost, customer loyalty, and networking effects
marginal revenue
the addition to total revenue you get from selling one more unit
best responce
the choice that yields the highest payoff given the other player's choice
opprotunity cost principle for labor supply
the cost of paid work is forgoing the time spent on leisure
derived demand
the demand for an input is derived from consumers' demand for the good or service produced with that input (an increase in demand for what you sell causes an increase in demand for workers/labor demand)
economic profit measures... on a graph
the distance between your benefits and your cost
market power
the extent to which a seller can charge a higher price without losing many sales to competing businesses
marginal product of labor
the extra output you produce from hiring an extra worker
the more market power you have...
the higher price you can charge
what prevents a firm from being able to reduce the discount effect as they lower their prices?
the inability to change different prices to different customers
discount effect
the price cut you'll have to offer x the quantity that gets that price cut
output effect
the price of the extra item you sell
second mover advantage
the strategic advantage that can follow from taking an action that adapts to your rival's choice
first-mover advantage
the strategic gain from an anticipatory action that can force a rival to respond less aggressively
labor supply
the time you spend working in a market
if scale effect dominates...
then labor and capital are compliments (decrease in price of capital will cause a rightward shift in labor demand curve)
if substitution effect dominates...
then labor and capital are substitutes (decrease in the price of capital will lead to a leftward shift in labor demand curve)
free entry markets
there are no factors making it particularly difficult or costing for a business to enter or exit an industry
leisure time
time not spent at work/working (any unpaid work)
average cost =
total cost/quantity
accounting profit =
total revenue - explicit costs
profit =
total revenue - total cost
average revenue (price) =
total revenue/quantity
average cost graph
u-shaped
free exit pushed prices _______ toward _______
up, average cost
marginal cost of labor=
wage
coordination game
when all players have a common interest in coordinating their choices
scale effect
when price of capital goods (or anything) decline, your business can produce output at a lower price
substitution effect
when the price of machines fall, the demand for workers (to do that same task can be substituted for machines) decreases
multiple equilibria
when there is more than one equilibrium
monopoly
when there is only one seller in the world
strategic interactions
when your best choice depends on what others choose, and their best choice may depend on what you choose
anti-coordination game
when your best response is to take a different (but complementary) action to the other player
perfect competition
where all firms sell the same good, and there are many buyers and sellers
labor markets
where wages and employment are determined by the intersection of the downward-sloping labor demand curve and the upward-sloping labor supply curve
rational rule for workers
work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure
negatives for consumers to merger laws
yields greater market power for new "mega" companies
cost-benefit principle for labor supply
you should work one more hour if the wage is greater than the marginal benefit for leisure
moving first can be useful when...
you want to commit to a particularly aggressive strategy