Mircoeconomics Final Exam
o An industry has 3 key characteristics:
The number of firms in the industry The similarity of the food or service produced by the firms in the industry The ease with which new firms can enter the industry
o Concentration ratios have the following flaws
They do not include the goods/services that foreign firms export to the US They are calculated for the national market, even though the competition in some industries, such as restaurants or college bookstores is mainly local They do not account for competition that sometimes exists between firms in different industries (For ex: Walmart is included in the discount department store industry but also competes with firms in the supermarket industry and the retail toy store industry
Which of the following is the definition of business strategy?
Actions taken by firms to attain their objectives
o _______ - a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
Allocative efficiency
o _______- laws aimed at elimination collusion and promoting competition among firms
Antitrust laws
o _____ attract firms to enter an industry
Economic profits
o ____ provides a way of characterizing the economic efficiency in a market
Economic surplus
o ______- the situation when a firm's long run average costs fall as the firm increases output
Economies of scale
Which of the following is a characteristic of a perfectly competitive market?
There are large numbers of buyers and sellers.
- Nash equilibrium
a set of strategies where each player chooses the strategy that gives the highest possible payoff, given the strategies chosen by the other players
A strategy that is the best for a firm, no matter what strategies other firms use is known as:
a dominant strategy
Laws aimed at promoting competition among firms are known as:
antitrust laws
o The actions of ______ have no effect on the market price
any single consumer or any single firm
o Game theory can be used to analyze ....
any situation in which groups or individuals interact
o The US Patent and Trademark Office defines a trademark as ...
any word, name, symbol, device or any combination, used or intended to be used to identify and distinguish the goods/services of one seller from those of other, and to indicate the source of the goods/services
o A market consists of all firms making products that consumers view ....
as close substitutes
Natural monopoly happens when the:
average total cost curve is decreasing
o The exit of firms forces up the equilibrium market price until the typical firm is _____
breaking even
o The most important barrier to entry is _____, which exist when a firm's long run average costs fall as the firm increases output
economies of scale
o Three important barriers to entry are ....
economies of scale, ownership of a key input and government imposed barriers
o What happens to profits in the long run? When a firm makes economic profit, it gives entrepreneurs an incentive to ______ the market These new firms will ____- the demand for El Diablo's burritos With few competitors, demand for burritos is ______. The firm makes an economic_____ Profit attracts new firms, which ______ the demand for an individual firm (right) New firms enter until the firm ..
enter reduce high (left) profit decreases no longer makes an economic profit
o The profit-maximizing level of output is also where marginal revenue ...
equals marginal cost
In 2007, the U.S. government discovered a long-run formal conspiracy to fix the price of marine hose. This type of activity is known as:
explicit collusion
o Accounting rules generally require that only ______ be include on the firm's financial statements
explicit costs
o If there are economies of scale in producing this memory chip, the average cost of producing it will ___, and competition will result in its price _______
fall falling as well
o Economies of scale exist when a firm's long run average cost _____ as it increases the quantity of output it produced
falls
o The ______ regulates business mergers because if firms gain market power by merging, they may use that market power to raise prices and reduce output
federal government
An oligopoly is a market structure with:
high barriers to entry
o The newly merged firm has a great deal of market power, but consumers are better off and economic efficiency Is ....
increased because the firm is more efficient
If the individual countries that are members of OPEC exceed their production quotas, the amount of oil supplied to the world __________, and the price of oil __________.
increases, decreases
o Industries with upward-sloping long-run supply curves are called ___________
increasing cost industries
o Price and quantity are determined by the ...
intersection of the demand and supply curves
o Economic _____ cause firms to exit an industry
losses
o Monopolists are _____
price setters (makers)
A buyer or seller that is unable to affect the market price is called a __________.
price taker
o Monopolists seek to maximize profit by choosing a ______, just like firms in perfectly competitive markets
quantity to produce
o True monopolies are ___
rare
Choosing a price is an example of a _____
business strategy
o In the years following passage of the Sherman Act, _________, but the term _____s have lived on to refer to the laws aimed at eliminating collusion and promoting competition among firms
business trusts disappeared antitrust law
o Game share three key characteristics:
Rules Strategies Payoffs • The payoff is the profit a firm earns as a result of how its strategies interact with the strategies of other firms
o In a trust, the firms were operated ______ but gave voting control to a board of trustees. The board enforced collusive agreements for the firms to charge the same price and not to compete for each other's customers
independently
In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to __________ and the market price to __________.
shift rightward, decrease
o The price of a good represents the ...
marginal benefit consumers receive from consuming the last unit of the good sold
o You want to continue producing until the marginal revenue you receive from selling another unit is equal to the _______. At that level of output, you will make ______ by selling another bushel, so you will have to maximized his profit
marginal cos to producing it no additional profit
o A firm's ______is the increase in total cost resulting from producing another unit of output
marginal cost
o The ________ is where the positive difference between total revenue and total cost is the greatest
profit-maximizing level of output
o In oligopolies, the interactions among firms are crucial in determining______ because the firms are large relative to the market
profitability
o Once a work no longer has legal protection, it is in the ______ and available to be freely used
public domain
o Occasionally, a government may decide to provide certain services directly to consumers through a ______
public enterprise
All games
- Rules - Strategies - Payoffs
o Barriers to entry may be high enough to keep out competing firms for four main reasons
-Government action blocks the entry of more than one firm into a market -One firm has control of a key resource necessary to produce a good -There are important network externalities in supplying the food or service -Economies of scale are so large that on firm has a natural monopoly
Modeling Oligopolies as a game
1. Identify the players 2. Identify each player's strategy space (all possible strategies) 3. Examine each possible combination of strategies and specify what happens to each player in each case (create the payoff matric)
A perfectly competitive market is a market which has:
1. Many buyers and sellers 2. All firms selling identical products 3. No barriers to new firms to enter the market
o Game theory, which was developed during the _____ by the mathematician John von Neumann and the economists Oskar Margenstern
1940s
A patent gives its holder the exclusive right to a product for a period of __________ from the date the patent is filed with the government.
20 years
Economists believe that the oligopoly market is a market with a four-firm concentration ratio that is greater than or equal to:
40%
o _________ - a firm's revenues minus all its costs, implicit and explicit
Economic profit
A monopoly is a market structure that is characterized by:
A single seller of a good or service that does not have a close substitute.
o ______ - anything that keeps new firms from entering an industry in which firms are earning economic profits
Barrier to entry
Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?
Both perfectly competitive and monopolistically competitive
o _______ - actions that a firm takes to achieve goal, such as maximizing profits
Business strategy
o In the US, governments block entry in 2 main ways:
By granting a patent, copyright, or trademark to an individual or a firm, giving it the exclusive right to produce a product By granting a firm a public franchise, making it the exclusive legal provider of a good or service
______ - a group of firms that collude by agreeing to restrict output to increase prices and profits
Cartel
_______- an agreement among firms to charge the same price or otherwise not to compete
Collusion
o _____ - an agreement among firms to charge the same price or otherwise not to compete
Collusion
Maximizing profit: _____: Why is profit not maximized where MC = ATC (at Q1)? Producing at Q1, maximizes ..., but NOT ... As long as MR > MC, producing more units ...
Common mistake profit per unit PROFIT increases profit
o ________ - an industry in which the typical firm's average costs do not change as the industry expands production will have a horizontal long run supply curve
Constant cost industries
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
Consumers pay a price greater than marginal cost but also have a wider array of choices.
______- an equilibrium in a game in which players cooperate to increase their mutual payoff
Cooperative equilibrium
o _____- a government granted exclusive right to produce and sell a creation
Copy right
o The most famous monopoly based on control of a raw material is the...
De Beers diamond mining and marketing company of South Africa
o _____ represents the loss of economic efficiency due to a monopoly
Deadweight loss
Price discrimination is the practice of:
Dividing consumers into two or more groups and charging different prices to each group.
______ - a strategy that is the best for a firm, no matter what strategies other firms use
Dominant strategy
o _______ - the situation in which a firm's total revenue is less than its total costs, including all implicit costs
Economic loss
o ______ - the study of how people make decisions in situations in which attaining their goals, depends on their interactions with others; in economics, the study of the decisions of firm's industries where the profits of a firm depend on its interactions with other firms
Game theory
o ______: the study of how people (firms) make decisions in situations in which attaining their goals depends on their interactions
Game theory
o Ex of calculating HHI: 1 firm, 100% market share (monopoly) • _________________________ 2 Firms, each 50% market share • _________________________ 4 firms, with market shares of 30%, 20% and 20% • _________________________ 10 firms, each with a 10% market share • _________________________
HHI=100^2=10,000 HHI=50^2+50^2=2,600 HHI=30^2+30^2+20^2+20^2=2600 HHI=10 X (10)^2 = 1,000
Another measure of industry concentration is the:
Herfindahl-Hirschman Index
o The guidelines use the ____ of concentration, which squares the market shares of each firm in the industry and adds up the values of the squares
Herfindahl-Hirschman Index
What is a merger between firms in the same industry called?
Horizontal merger
o ________ - a merger between firms in the same industry
Horizontal merger
o _______ - a government designation that a firm is the only legal provider of a good or service
Public franchise
Which of these statements is correct?
Legally enforcing trademarks can be difficult.
o ______ shows the lowest cost at which a firm is able to produce a given quantity of output in the long run. So, we would expect that in the long run, competition drives the market price to the minimum point on the typical firm's long-run average cost curve
Long run average cost curve
o_______ - the situation in which the entry and exit of firms has resulted in the typical firm breaking even
Long run competitive equilibrium
_____________ -- Since there are barriers to entry, additional firms cannot enter the market (profits cannot be competed away)
Long run profits for a monopoly
o ________ - a curve that shows the relationship in the long run between market price and the quantity supplied
Long run supply curve
o Steps to identify profit: • Use ______ to identify the profit-max quantity • Draw a _____ at that quantity • The price where the line hits the demand curve is the ______ • The cost where the line hits the ATC curve is the ______ • The difference between price and average cost is the per unit _____ • Profit is the rectangle with height_____ and length (Q* - 0)
MC=MR rule vertical line profit-max price average cost profit or loss (P - ATC)
o _____ = change in total revenue / change in quantity
MR
Reinterpreting MR=MC - The profit-maximizing level of output is the level of output, where ... - What if the firm doesn't make a profit at any output? - In this case, we would want to minimize the ... - Sometimes a loss may be ____, if we have high fixed costs - The _____ still gives the loss-minimizing level of output
MR=MC loss (negative profit) unavoidable MR=MC rule
o __Perfectly competitive market_____ - a market that meets the conditions of:
Many buyers and sellers All firms selling identical products No barrier to new firms entering the market
o _______ intersects the average variable cost where the average variable cost curve is at its minimum point
Marginal cost curve
Which of the following best describes the additional revenue associated with selling an additional unit of output?
Marginal revenue
o ___________- the change in total revenue from selling one more unit of a product
Marginal revenue
o _____ - the ability of a firm to charge a price greater than marginal cost
Market power
What is the term given to all the activities necessary for a firm to sell a product to a consumer?
Marketing
o________ is a market structure in which barriers to entry are low and many firms compete by selling similar, but not identical products Ex: El Diablo sells burritos and competes against other firms selling burritos, but its burritos are not identical to its competitors Many restaurants in Newark sell burritos including El Diablo Some customers have a preference for El Diablo's burritos If el diablo raises its price, some but not all, of their customers will switch to buying their burritos elsewhere El diablo faces a downward sloping demand curve
Monopolistic competition
In which of the following market structures is the firm's demand curve the same as the market demand for the product?
Monopoly
o _____- a firm that is the only seller of a good or service that does not have a close substitute
Monopoly
o We can summarize the effects of monopoly as follows: - - -
Monopoly causes a reduction in consumer surplus Monopoly cause an increase in producer surplus Monopoly causes a deadweight loss, which represents a reduction in economic efficiency
Which of the following is an effect of a monopoly?
Monopoly causes a reduction in consumer surplus.
______ - a situation in which each firm chooses the best strategy, given the strategies chosen by other firms
Nash equilibrium
A situation where each firm chooses the best strategy, given the strategies chosen by other firms is known as:
Nash equilibrium
o _____- 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 monopoly
Which of the following statements regarding natural monopoly is true?
Natural monopoly is most likely to occur in markets where fixed costs are large relative to variable costs.
Which type of efficiency is achieved by a monopolistically competitive firm in the long run?
Neither allocative nor productive efficiency
o ____ - a characteristic of a product in which its usefulness increases with the number of consumers who use it
Network externalities
_______ - an equilibrium in a game in which players do not cooperate but pursue their own self interest
Non-cooperative equilibrium
Which of the following terms is defined as a market structure in which a small number of interdependent firms compete?
Oligopoly
o When a firm cuts the price of a product
One good thing happens - the firm sells more units of the product One bad thing happens - the firm receives less revenue from each unit than it would have received at a higher price
In the short run, the firm should:
Operate if price > average variable cost.
o The ______ targeted firms In several industries that had combined during the 1870s and 1880s to form "trusts"
Sherman Act
o If unregulated, the monopoly will charge a price equal to ______
Pm and produce Qm.
In perfect competition, the marginal revenue is the same as:
Price
_______ - a firm implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change
Price leadership
o _____ - a buyer or seller that is unable to affect the market price
Price taker
_________ - a game in which pursuing dominant strategies results in non-cooperation that leaves everyone worse off
Prisoner's dilemma
- _____ likely give rise to price competition
Prisoners' dilemma situations
Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?
Product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs.
o ________ - the situation in which a good or service is produced at the lowest possible cost
Productive efficiency
o As the monopolist decreases price to expand output, two effects occur
Revenue increases from selling extra units of output (output effect) Revenue decreases, because the price reduction is shared with existing customers (price effect) Hence, MR is always below demand for monopolist
o _______ - the minimum point on the firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
Shutdown point
o The most notorious of the trusts was the ...
Standard Oil Trust, organized by John D Rockefeller
o ______ - a cost that has already been paid and cannot be recovered
Sunk cost
What is the term given to a cost that has already been paid and cannot be recovered?
Sunk costs
o ______ for a firm tells us how many units of a product the firm is willing to sell at any given price
Supply curve
Which of the following laws prohibited charging buyers different prices if the result would reduce competition?
The Robinson-Patman Act
Which of the following laws outlawed monopolization?
The Sherman Act
What is the definition of market power?
The ability of a firm to charge a price greater than marginal cost.
Which of the following rights is given to the holder of a patent?
The exclusive right to a new product
o Federal regulators deal with 2 factors that can complicate evaluating horizontal mergers
The extent of the market • The government defines the relevant market on the basis of whether there are close substitutes for the products being made by the merging firms Possible increases in economic efficiency • If the monopoly has lower costs than the competitive firms, it is possible for price to decline and quantity to increase • The demand curve shows that the monopolist can sell this quantity of the food at a price of Pmerge. Therefore, the price declines after the merger tom Pc to Pmerge, and the quantity increases from Qc to Qmerge
o ________ - a merger between firms at different stages of production of a good
Vertical merger
o In analyzing oligopoly, we cannot rely on the same types of graphs we use in analyzing perfect competition and monopolistic competition - for 2 reasons:
We need to use economic models that allow us to analyze the more complex business strategies of large oligopoly firms. These strategies involve more than choosing the profit maximizing price and output Even in determining the profit maximizing price and output for an oligopoly firm, demand curves and cost curves are not as useful as in the cases of perfect competition and monopolistic competition. We are able to draw the demand curves for competitive firms by assuming that the prices these firms charge have no effect on the prices other firms in their industries charge. This assumption is realistic when each firm is smell relative to the market. It is not a realistic assumption, however, for firms that are as large relative to their markets as Microsoft, General Motors, or Walmart
In which of the following situations can a firm be considered a monopoly?
When a firm can ignore the actions of all other firms
When firms agree to act as a monopoly and set prices they are called __________.
a cartel
o Economic efficiency requires the last unit of a good/service produced to provide an ...
additional benefit to consumers equal to the additional cost of producing it
o New firms will continue to enter a market until ...
all economic profit is eliminated and that established firms remain in a market despite not earning any economic profit
non-cooperative equilibrium
an equilibrium in a game in which players do not cooperate but pursue their own self interest
Any action the firm takes to maintain product differentiation over time is known as:
brand management
o Trademarks are also referred to as ____
brand names
o The entry of firms forces down the market price until a typical firm is ______
breaking even
o For a firm in a perfectly competitive market, price is equal to ...
both average and marginal revenue
Long-run equilibrium in perfect competition results in:
both productive and allocative efficiency
A group of firms that colludes by agreement to restrict output to increase prices and profits is called a(n) __________.
cartel
o To achieve economic efficiency, regulators should require the monopoly to ______
charge a price equal to Pe
An agreement among firms to charge the same price or to otherwise not compete is __________.
collusion
o Because monopolies do not face _____, every firm would like to have a _____. But to have a monopoly, barriers to entering the market must be ...
competition monopoly so high that no other firms can enter
o Firms attempt to avoid the effects of...
competition in various ways
o Because a monopoly raised the market price, it reduced ______
consumer surplus
o We measure _____ as the area below the demand curve and above the market price
consumer surplus
o Another way for a firm to become a monopoly is by ______
controlling a key resource
o Governments regulate firms that are natural monopolies, often by ....
controlling the prices they charge
A cooperative equilibrium is equilibrium in which players __________ to increase their mutual payoffs, while a noncooperative equilibrium is an equilibrium in which players __________.
cooperate, do not cooperate
Equilibrium in a game in which players cooperate to increase their mutual payoff is called a:
cooperative equilibrium
o In the long run, only the consumer benefits from _____
cost reductions
Use sequential games to analyze 2 business strategies:
deterring entry and bargaining between firms
We can analyze a sequential game by using a _______
decision tree
o If there are economies of scale in producing a good, the average cost of producing it will ...
decline as output increases
o If the definition of a market is too narrow, a price increase will cause firms to experience a significant ....
decline in sales—and profits -as consumers switch to buying close substitutes
o Industries with downward-sloping long run supply curves are called ________
decreasing cost industries
o With a natural monopoly, the average total cost curve is still falling when it crosses the ______
demand curve
o Monopolists face a ______ demand curve
downward sloping
The only legal restriction concerning price discrimination is that firms cannot use it to:
drive rivals out of business
o Natural monopolies are most likely to occur in markets where ....
fixed costs are very large relative to variable costs
The four-firm concentration ratio is the percentage of sales accounted for by the largest:
four firms in the industry
An advertisement offering to match competitors' prices might seem to benefit consumers, but ______ shows that it actually may hurt consumer by helping to keep prices high
game theory
o The approach we use to analyze competition among oligopolies is called _____
game theory
o Firms are free to legality produce chemically identical drugs called _____
generic drugs
A Nash equilibrium is where each firm chooses the best strategy:
given the strategies chosen by other firms
In a repeated game, the losses associated with not cooperating are __________ the losses of cooperating.
greater than
If the average total cost curve is above the demand curve, then this firm is:
having economic losses
o Deciding whether to produce or to shut down in the short run If a firm in a perfectly competitive market is making a loss, ideally it would like the price to be _____, but it is a price taker. The firm can: • _________ produce, or • Stop production by _____ Either way, the firm needs to pay its _______. The decision comes down to whether producing (obtaining some revenue and some variable costs) results in a ____ Firm should shut down when the total revenue from staying open is ______ than the fixed and variable cost for staying home A firm's SR Supply Curve: • A firm should shut down production if: o Total revenue (P*Q) < _____ o Dividing both sides by Q: P < ______ o If P < AVC: produce ______ o If P > = AVC: _____ o (For a perfectly competitive firm: ____) o A firm will produce where ____ o P=MC for a ______ o If price is too low, (P < min. AVC), the firm will produce ______ "If everyone can do it, you ________ at it": the entry and exit of firms in the long run
higher Continue to shutting down temporarily fixed costs smaller loss than not producing at all less variable costs (VC) AVC Q=0 units of output produce where MR = MC P = MC MR=MC perfectly competitive firm zero output below the shutdown point (Q sd) can't make money
Measuring the efficiency loss from monopoly: • In a monopoly less units are trade and each unit trades at a ____________ • Consumer surplus will ____ (with the higher price) • Producer surplus must _____, otherwise the firm would have chosen the perfectly competitive price and quantity • Does the increase in producer surplus offset the decrease in consumer surplus? o ....
higher price than in a perfect competition fall rise No! Fewer trades means the economic surplus must fall. Recall, perfectly competitive markets maximize the economic (total) surplus in a market
The monopolist charges a price that is __________ the perfectly competitive industry.
higher than
o Firms in perfectly competitive markets face ___. These firms are ____. All other firms, including monopolies are ______.
horizontal demand curves price takers price makers
o These firms sell either ______ products and entry costs are ____ The analysis requires a new set of tools. Why? • Oligopolists are ____, and know that their actions have an effect on one another • ____ to entry exist, preventing firms from competing away profits
identical or differentiated high large Barriers
o Should treat your sunk cost as ______ to your short run decision making
irrelevant
o The marginal revenue curve for a perfectly competitive firm is the same as ...
its demand curve
A monopolistically competitive firm in a long-run equilibrium produces where:
its demand curve is tangent to its average total cost curve
o A market is concentrated if a relatively small number of firms have a ....
large share of total sales in the market
o In the US, a key resource for a professional sports team is a _____
large stadium
The monopolist produces an output that is __________ the perfectly competitive industry would produce.
less than
o Economists can identify close substitutes by ....
looking at the effect of a price increase
o The competitive forces of the market impose relentless pressure on firms to produce new and better goods and services at the _____
lowest possible cost
Market Structures: Monopolistic # of firms type of product ease of entry examples
many differentiated high clothing stores, restaurants
Market Structures: Perfect # of firms type of product ease of entry examples
many identical high wheat, poultry
Perfectly competitive markets: ______ buyers and________ product imply that perfectly competitive firms are price takers: firms are _____ to affect the market price - A perfectly competitive firm faces a _______ (perfectly elastic) o Suppose you are a wheat farmer; whether you sell 6,000... o ...or 15,000 bushels of wheat, you received the ____ per bushel o There are thousands of individual wheat farmers; their aggregate supply, combined with the overall market demand for wheat, determines the market price of wheat (left o The Individual farmer takes this marker price as her given demand curve (right)
many identical unable horizontal demand curve same price
A monopolist will maximize profit at the level of output where:
marginal cost equals marginal revenue
o How a monopolistically competitive firm maximizes profit in the short run Profit maximization requires producing until the ...
marginal revenue from the last unit is just equal to the marginal cost: • MC(Q*) = MR(Q*) Marginal revenue = marginal cost (Midnight rule)
o A monopoly differs from other firms in that a monopoly's demand curve is the same as the ______
market demand curve for the product
The offer to ______ is a good enforcement mechanism because it guarantees that if either restaurant fails to cooperate and charges the lower price, the competing restaurant will automatically punish that restaurant by also charging the lower price
match prices
- How a firm maximizes profit: o Assumption: All firms aim to ... o Profit = ________ o = P*Q - TC = (P - TC/Q) * Q o = (p - ATC) * Q o For a perfectly competitive firm: P = AR = MR
maximize profit total revenue (TR) - total cost (TC)
o The _____ state that increases in economic efficiency will be taken into account and can lead to approval of a merger that otherwise would be opposed, but the burden of showing that the efficiencies exist lies with the merging firms
merger guidelines
o In the long run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price determined by the _______ on the typical firm's average total cost curve
minimum point
o In the US, antitrust laws are designed to prevent _____
monopolies and collusion
o Compared with perfect competition, in a _____, the price of a good or service is higher, output is lower and consumer surplus and economic efficiency are reduced
monopoly
o The ________ is useful in analyzing situations in which firms agree to collude (not compete) and act together as is they were a monopoly
monopoly model
o Local or state regulatory commissions usually set the prices for ______, such as firms selling natural gas or electricity
natural monopolies
o A ______ is a situation where 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 monopoly
The profit- maximizing level of output - Whenever TR > TC, profit is ... - Whenever TR < TC, profit is....
negative (loss) positive (gain)
- Nash equilibrium is an example of a ______
non-cooperative equilibrium
Prisoner's dilemma is an example of:
non-cooperative equilibrium
In 2002, the cheese manufacturing industry in the United States had a four-firm concentration ratio of 34 percent. This implies that the cheese manufacturing industry is:
not an oligopoly market
o A firm can ignore the prices other firms charge, it has a monopoly because other firms must ....
not be producing close substitutes
o In the long run, the owners of the monopoly will ....
not continue in business if they are experiencing a loss
o Firms that fail to adequately anticipate changes in consumer tastes or that fail to adopt the latest and most efficient technology do ...
not survive in the long run
o Graphical analysis of one firm's actions will not capture the ...
nuances of an oligopolistic market
• In the US governments block entry in 2 main ways:
o Patents and copyrights o Newly developed products like drugs are frequently granted patents, the exclusive right to produce a product for a period of 20 years from the date the patent is filed with the government o Similarly, copyright produce the exclusive right to produce and sell creative works like books and films o Patents and copyrights encourage innovation and creativity sine without them, firms would not be able to substantially profit from their endeavors
• In the US, governments block entry in 2 main ways
o Public franchises A public franchise is a firm that is the only legal provider of a good or service (determined by the government) Ex: water and utilities Sometimes governments even operate firms as a public enterprise (US postal service)
o Governments also restrict competition through _______
occupational licensing
o An ______, is a market structure in which a small number of interdependent firms compete
oligopoly
Market Structures: Monopoly # of firms type of product ease of entry examples
one unique entry blocked municipal water, postal service
o Because a firm in a ______ is very small relative to the market and because it is selling exactly the same product as every other firm, it can sell as much as it wants without having to lower its price
perfectly competitive market
o Consumers and firms have to accept the market price if they want to buy and sell in a ______
perfectly competitive market
o Prices in ______ are determined by the interaction of demand and supply for the food or service
perfectly competitive markets
o Because monopolies reduce consumer surplus and economic efficiency, most governments have ...
policies that regulate their behavior
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
• For a firm to exist as a monopoly, there must be barriers to entry ________ other firms coming in and competing with it o Four main reasons for barriers to entry - - - -
preventing Government restrictions on entry Control of a key resource Network externalities Natural monopoly
A firm in perfect competition earns profit if:
price is greater than average total cost
o In a perfectly competitive market, firms in these industries are unable to control the _________ they sell and are unable to earn an economic profit in the long run for 2 main reasons: - -
prices of the products Firms in these industries sell identical products It is easy for new firms to enter these industries
A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off is called a:
prisoner's dilemma
o We measure______ as the areas above the supply curve and below the market price
producer surplus
o Comparing monopolistic competition and perfect competition Recall, perfectly competitive markets achieve _____ ________ - refers to producing items at the lowest possible cost • _______ - refers to producing all goods up to the point where the marginal benefit to consumers is just equal to the marginal cost to firms • Monopolistic competition results in _____ productive or/nor allocative efficiency • Monopolistically competitive firms produce where ______ • At Qmc, MB does _____ MC and ATC > min. ATC (neither allocative nor productive efficiency) • _____- is a market structure consisting of a firm that is the only seller of a good/service that does not have a close substitute • In terms of market concentration, monopolies are at the _______ • Why is it important? o Some markets are true monopolies, so it is important to understand how monopolists behave o Firms might______ in order to act like a monopolist; knowing how monopolies act helps us identify these firms o Do monopolies really exist? Suppose you live in a small town with only one pizzeria. Is the pizzeria a monopoly? Other fast food restaurants pose ____ Grocery stores that sell frozen pizza pose competition If you consider these alternatives to be close substitutes, then the pizza restaurant is not a monopoly If not, then the pizza restaurant is a monopoly
productive and allocative efficiency • Productive efficiency Allocative efficiency neither nor MC=MR (here ar Qmc) not equal Monopoly opposite end of a perfect competition collude competition
o Perfect competition results in ______
productive efficiency
o If economies of scale are relatively unimportant in the industry, the typical firm's long run average cost curve will .... The industry will have room for a _____ of firms and will be competitive. If economies of scale are significant, the typical firm will.... In that case, the industry will have room for only a _____ and will be an
reach a minimum at a level of output that is a small fraction of total industry sales large number not reach the minimum point on its long run average cost curve until it has produced a large fraction of industry sales few firms, oligopoly
Illustrating profit (loss) graphically - Profit = TR (P*Q) - TC (ATC *Q) - Profit = (P-ATC)*Q - (Area of a ...)
rectangle of height (P-ATC) and of width Q
o The more firms there are in an industry, the farther to the _____ the market supply curve is
right
o As long as the marginal cost of selling one more subscription is less than the marginal revenue, the firms should ...
sell additional subscriptions because it is adding to its profit
o As long as price is above average variable cost, you will continue to produce in the ______, even when suffering losses. But in the long run, firms will...
short run exit an industry if they are unable to cover all their costs
A firm may opt to pay millions of dollars for celebrity endorsements in order to:
signal to consumers that the advertised product is appealing and likely to be popular
GAME: so far, all players (firms made their decisions _________ in the business world, many games are __________ in nature: one firm makes a decision and the other firm decides after having observed the first firm's decision we will use a so called ______ to analyze these situations : a decision tree indication the moves and outcomes
simultaneously sequential decision tree
o The greater the economies of scale, the ___ the number of firms that will be in the industry
smaller
o If the price drops below average variable cost, the firm will have a ________ if it shuts down and produces no output. So, the firms marginal cost curve is its supply curve only for prices at or above average variable cost
smaller loss
o The higher the price, the...
smaller the consumer surplus
o If price makers raise their prices, they will lose _______. Therefore, they face both a downward sloping demand curve and a downward sloping marginal revenue curve
some, but not all of their customers
- A price match guarantee allows firms to tacitly collude prices ... o Ex:
stay high as long as forms abide in the 1970s, GM would announce a price change at the beginning of a model year, and Ford and Chrysler would match GM's price change
A _______ in a Nash equilibrium is when no player can make himself or herself better off by changing his or her decision at any decision mode
sub-game perfect equilibrium
o A perfectly competitive firm's marginal cost curve is also its ______
supply curve
o We can measure the additional benefit consumers receive from _________, and we can measure the additional cost to the monopoly of producing the last unit by ______
the last unit by the price of the product marginal cost
o In the 19th century, the biologist Charles Darwin developed a theory of evolution based on the idea of the "________". Only those plants and animals that are best able to adapt to the demands of their environment are able to survive. Darwin first realized the important role that the struggle economists' descriptions of the role it plays in the economic world. Just as "survival of the fittest" is the rule in nature, so it is in the _____
survival of the fittest economy
o A ______ is a tax on imports and a quota limits the quantity of a good that can be imported into a country
tariff
- Payoffs
that are the results in the interactions among the players strategies
- Rules
that determine what actions are allowable
- Strategies
that players employ to attain their objectives in the game
o The difference between the marginal revenue and the marginal cost is ...
the additional profit (or loss) from producing one more bushel
o In the context of economic analysis, game theory is the study of .... It has also been applied to strategies for ...
the decisions of firms in industries where the profit of each firm depends on its interactions with other firms nuclear war, international trade negotiations, and political campaigns, among many other examples
In the broadest sense, game theory studies the decisions of firms in industries where the profits of each firm depend on:
the firm's interactions with other firms
Monopolistically competitive firms have some control over price because:
the products they produce are differentiated
o The actions of one oligopolist have a huge impact on ....
the profits of their competitors
o A _____ grants a firm legal protection against other firms using its product's name
trademark
o The loss of economic efficiency is this small primarily because _____. In most industries, competition keeps price much closer to marginal cost than would be the case in a monopoly. The closer price is to marginal cost, the smaller the size of the deadweight loss
true monopolies are very rare
o A merger between firms in an industry that has a very low concentration is ....
unlikely to increase market power and can be ignored
o There are network externalities in the consumption of a product if its _____ with the number of people who use it
usefulness increases
Governments deal with natural monopolies by:
using regulation to protect consumers
o Not only do perfectly competitive firms produce goods and services at the lowest possible cost, they also produce the goods and services that consumers _____
value most
o Network externalities can set off a _____: if a firm can attract enough customers initially, it can attract additional customers because the value of its product has been increased by more people using it, which attracts even more consumers and so on
virtuous cycle
o If a perfectly competitive firm tries to raise its price, it ...
won't sell anything at all because consumers will switch to buying the product from the firm's competitors
In the long run, the monopolist can earn:
zero or positive economic profit
o Network externalities Network externalities prescribe a situation where the usefulness of a product increases with the _____ - - -
• Auction sites (eBay) • PC operation systems (Windows) • Social networking cites (Facebook)
o Economists played a major role in the ....
development of merger guidelines by the Department of Justice and the FTC in 1982
The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.
differentiated, downward-sloping
o Competition erodes _____
economic profits
o Equilibrium in a perfectly competitive market results in the greatest amount of ...
economic surplus, or total benefit to society, from the production of a good or service
o A natural monopoly occurs when ...
economics of scale are so large that one firm can supply the entire market at a lower average total cost than can 2+ firms
o The only firms that do not have market power are firms in perfectly competitive markets, which must charge a price ________. Because few markets are perfectly competitive, ....
equal to marginal cost some loss of economic efficiency occurs in the market for nearly every good/service
Market Structures: Oligopoly # of firms type of product ease of entry examples
few identical or differentiated low automobiles, computers
A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:
low barriers to entry
o Most firms resemble monopolies in being able to charge a price above _____, however, most markets have enough competition to keep the efficiency losses from market power low
marginal cost
o Perfectly competitive firms produce up to the point where the price of the good equals the ... o Therefore, firms produce up to the point where the last unit provides a _______ to consumers equal to the marginal cost of producing it
marginal cost of producing the last unit marginal benefit
o Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the ______
marginal cost of producing them
o For a firm in a perfectly competitive industry, price is equal to ______, or P = MR. So we can restate the MR = MC condition as P = MC
marginal revenue
A monopolistically competitive firm produces where:
marginal revenue equals marginal cost
o Like every other firm, a monopoly maximizes profit by producing where ....
marginal revenue equals marginal cost
o Producer surplus measures the _____ to producers from selling a good or service
net benefit
o Consumer surplus measures the ...
net benefit received by consumers from purchasing a good or service
When does a firm make a profit? - At any level of ____, o If P > ATC: the firm is making a _____ o If P = ATC: the firm is ______ o If P < ATC: the firm is making a _____ o To maximize ___________, find the output level, where MR=MC
output profit breaking even loss profit (minimize losses)
o ____ - the exclusive right to a product for a period of 20 years from the date the patent application is filed with the government
patent
o The US government grants _____ to firms that develop new products or new ways of making existing products
patents
o Three important government imposed barriers to entry are ...
patents, licensing requirements, and restrictions on international trade
o A monopoly will produce less and charge a higher price than would a ...
perfectly competitive industry producing the same good
o Short run vs Long run In the short run, a monopolistically competitive firm might make a _____ In the long run, firms just ______ (where the ATC curve is just tangent to the demand curve) In the long run, firms can • ______ to reduce costs below other firms' costs • Convince their customers that ... (by making it better or by making customers believe that its better - advertising)
profit (or a loss) break even Innovate their product is better than others
o Even in the oligopolies discussed in this chapter, firms have difficulty earning an economic profit in...
the long run
Because the monopolist faces a downward sloping demand curve:
there will be deadweight loss
o A merger between firms in a market that is already highly concentrated is ....
very likely to increase market power
o In the short run, a firm experiencing a loss has two choices - -
Continue to produce Stop production by shutting down temporarily
Which of the following is most likely to increase market power?
Horizontal mergers
How does the prisoner's dilemma compare to the outcome of a repeated game?
In a repeated game, two firms are more likely to charge the high price and receive high profits.
o ____ - the exclusive right to a product for a period of 20 years from the date the patent application is filed with the government
Patent
______ - a table that shows the payoffs that each firm earns from every combo of strategies by the firms
Payoff matrix
o The monopoly will then produce Qe. But here is the drawback: ....
Pe is less than average total cost, so the monopoly will be suffering a loss, shown by the area of the red shaded rectangle
For what type of market structure is the demand curve the same as marginal revenue?
Perfect competition
o _______ - total revenue divided by the quantity of the product sold
average revenue
o Economic surplus is equal to the sum of _____
consumer surplus and producer surplus
o Collusion is _____ in the US, but occasionally happens
illegal
Price leadership is a form of __________ in which one firm in an oligopoly announces a price change and the other firms in the industry match the change.
implicit collusion
o Governments also impose barriers to entering some industries by ...
imposing tariffs and quotas on foreign competition
o Trademarks, unlike patents and copy rights ....
never expire
o Firms are locked in a ______ to earn an economic profit
never-ending struggle
o An oligopoly is an industry with ....
only a few firms
Control of a key resource:
• For many years, the Aluminum Company of American either owned or had long term contracts for almost all the world's supply of bauxite, the mineral from which we obtain aluminum • Such control over a key resource serves as a substantial barrier to entry for additional firms • The NFL acts as a monopoly too
o The guidelines were modified in 2010 and have 3 main parts
• Market definition • Measure of concentration • Merger standards
Steps to identify the profit-
• Use MC=MR rule to identify the profit-max. quantity, Qm • Draw a vertical line at Qm. The price where the line hits the demand curve is the profit-max. Price Pm • The cost where the line hits the ATC curve is the average cost. The difference between price and average cost is the per unit profit or loss • Profit is the rectangle w/height (P-ATC) and length (Qm-0)
5 competitive forces
• competition from existing firms • the threat from potential entrants • competition from substitute goods or services • the bargaining power of buyers • the bargaining power of suppliers
