ECN 1A Midterm 2
What is Allocative efficiency?
A situation in which consumers are all paying the lowest prices possible and all the producers capable of supplying at that price are doing so.
Give an example of Economies of Scale
A small factory like S produces 1,000 alarm clocks at an average cost of $12 per clock. A medium factory like M produces 2,000 alarm clocks at a cost of $8 per clock. A large factory like L produces 5,000 alarm clocks at a cost of $4 per clock. Economies of scale exist because the larger scale of production leads to lower average costs.
How does a Profit-Maximizing Monopoly Choose Output and Price?
A monopolist can charge any price for its product, but the demand for the firm's product constrains the price. Because the monopolist is the only firm in the market, its demand curve is the same as the market demand curve.
Enumerate all types of profit
Accounting profit is the difference between dollars brought in and dollars paid out. >> Accounting Profit = Total Revenue - Explicit Costs Economic profit - includes both explicit and implicit costs. Economic Profit = Total Revenue - Total Costs Total Costs = Explicit Costs + Implicit Costs
What are Antitrust laws?
Antitrust laws - laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones. Historical antitrust laws: o Sherman Antitrust Act o Clayton Antitrust Act o Celler-Kefauver Act
Discuss the Adjustment Process in a Constant-Cost Industry
CONSTANT COST - In (a), demand increased and supply met it. Notice that the supply increase is equal to the demand increase. The result is that the equilibrium price stays the same as quantity sold increases. INCREASING COST - In (b), notice that sellers were not able to increase supply as much as demand. Some inputs were scarce, or wages were rising. The equilibrium price rises. DECREASING COST - In (c), sellers easily increased supply in response to the demand increase. Here, new technology or economies of scale caused the large increase in supply, resulting in declining equilibrium price.
What is Cost-plus regulation and Price cap regulation?
Cost-plus regulation - when regulators permit a regulated firm to cover its costs and to make a normal level of profit. Price cap regulation - when the regulator sets a price that a firm cannot exceed over the next few years.
What is deregulation and regulatory capture?
Deregulation - removing government controls over prices and quantities. Regulatory capture - when the supposedly regulated firms end up playing a large role in setting the regulations that they will follow and as a result, they "capture" the people usually through the promise of a job in that "regulated" industry once their term in government has ended.
What is a differentiated product?
Differentiated product - a product that consumers perceive as distinctive in some way. Ways for a product to be differentiated: o physical aspects o location from which it sells o intangible aspects o perceptions
What is entry, exit, and long-run equilibrium?
Entry - when new firms enter the industry in response to increased industry profits. Exit - the long-run process of reducing production in response to a sustained pattern of losses. Long-run equilibrium - where all firms earn zero economic profits producing the output level where Price = Marginal Revenue = Marginal cost and Price = Average cost.
What are the key benefits of differentiated products?
Even though monopolistic competition does not provide productive efficiency or allocative efficiency, it does have benefits of its own. Product differentiation is based on variety and innovation. Many people would prefer to live in an economy with many kinds of clothes, foods, and car styles... Economists have struggled - with only partial success - to address the question or whether a market-oriented economy produces the optimal amount of variety
What is game theory and the Prisoner's dilemma?
Game theory - a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. Prisoner's dilemma - a scenario in which the gains from cooperation are larger than the rewards from pursuing self- interest.
How do monopolists earn revenue?
Total costs rise as output increases. The highest profit will occur at the quantity where total revenue is the farthest above total cost. Total revenue for the monopoly firm called HealthPill first rises, then falls. Low levels of output bring in relatively little total revenue, because the quantity is low. High levels of output bring in relatively less revenue, because the high quantity pushes down the market price. The total cost curve is upward-sloping. Profits will be highest at the quantity of output where total revenue is most above total cost. Of the choices in Table 9.2, the highest profits happen at an output of 4. The profit-maximizing level of output is not the same as the revenue-maximizing level of output, which should make sense, because profits take costs into account and revenues do not.
What are tying sales and bundling?
Tying sales - a situation where a customer is allowed to buy one product only if the customer also buys another product. Bundling - a situation in which multiple products are sold as one.
What do antitrust laws do to monopolies?
Under U.S. antitrust laws, monopoly itself is not illegal. But, U.S. antitrust laws include rules against some restrictive practices. Restrictive practices - practices that do not involve outright agreements to raise prices or to reduce the quantity produced, but that might have the effect of reducing competition.
How do natural monopolies arise?
in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. in smaller local markets for products that are difficult to transport. when a company has control of a scarce physical resource. In this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.
What is the Dodd-Frank Act?
"To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail," to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices..."
In terms of a demand curve, differentiate a perfectly competitive firm and a monopolist
(a) A perfectly competitive firm perceives the demand curve that it faces to be flat. The flat shape means that the firm can sell either a low quantity (Ql) or a high quantity (Qh) at exactly the same price (P). (b) A monopolist perceives the demand curve that it faces to be the same as the market demand curve, which for most goods is downward-sloping. Thus, if the monopolist chooses a high level of output (Qh), it can charge only a relatively low price (Pl); conversely, if the monopolist chooses a low level of output (Ql), it can then charge a higher price (Ph). The challenge for the monopolist is to choose the combination of price and quantity that maximizes profits.
What's the trend for mergers?
(a) The number of mergers in 1999 and 2000 were relatively high compared to the annual numbers seen from 2001-2012. While 2001 and 2007 saw a high number of mergers, these were still only about half the number of mergers in 1999 and 2000. (b) In 2012, the greatest number of mergers submitted for review was for transactions between $100 and $150 million.
What are explicit and implicit costs?
* Explicit costs - out-of-pocket costs; actual payments. o Examples: Wages, rent * Implicit costs - the opportunity cost of using resources that the firm already owns. o Examples: working in the business without getting a formal salary, using the ground floor of a home as a retail store o Allow for depreciation of goods, materials, and equipment
Define firm, private enterprise, and production
* Firm (or producer or business) - an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs. * Private enterprise - the ownership of businesses by private individuals * Production - the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs. Examples: transportation, distribution
Summarize the previous flashcard
* If average total cost < price, a profit is earned * If average total cost = price, a profit is not earned * If average total cost > price, a profit is lost.
Discuss Profits and Losses with the Average Cost Curve
* In (a), price intersects MC above the AC curve. o Since price > AC, the firm is making a profit. * In (b), price intersects MC at the minimum point of the AC curve. o Since price = AC, the firm is breaking even. * In (c), price intersects MC below the AC curve. o Since price < average cost, the firm is making a loss.
What are the Structure of Costs in the Long Run?
* In the long run, all factors (including capital) are variable. * Production function is Q = f [L, K] * Because all factors are variable, the long run production function shows the most efficient way of producing any level of output. * The long run is the period of time when all costs are variable.
What is profit and revenue?
* Revenue: the income a firm generates from selling its products. o Total Revenue = Price × Quantity Sold * Profit = Total Revenue - Total Cost
What does the total cost/total revenue graph look like for a raspberry farm?
* Total revenue for a perfectly competitive firm is a straight line sloping up; the slope is equal to the price of the good. * Total cost also slopes up, but with some curvature. * At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns. * The maximum profit will occur at the quantity where the difference between total revenue and total cost is largest.
Discuss what happens when heating cost increases Government imposes taxes on certain products like gasoline, cigarettes, and alcohol
- A tax on alcohol -> higher price -> budget constraint moves to the left -> decreased consumption - OR people may cut back on other purchases
Discuss what happens when heating cost increases
- Some people reduced the quantity demanded of energy (turning down thermostats, wearing heavier sweaters inside) - Others adjusted consumption in other ways (fewer dinners out, postponing purchases and/or vacation plans)
What is a price taker?
A firm in a perfectly competitive market that must take the prevailing market price as given.
What is predatory pricing?
A firm uses the threat of sharp price cuts to discourage competition. A violation of U.S. antitrust law, but it is difficult to prove.
How Do Perfectly Competitive Firms Make Output Decisions?
A perfectly competitive firm has only one major decision to make - what quantity to produce? A perfectly competitive firm must accept the price for its output as determined by the product's market demand and supply. The maximum profit will occur at the quantity where the difference between total revenue and total cost is largest.
What is Barriers to entry?
Are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market.
Calculate average total costs, average variable costs, and marginal costs
Average total costs = total cost ÷ # of output produced Average variable costs = variable cost ÷ # of output produced Marginal cost (MC) -the additional cost of producing one more unit of output. = (change in average total costs)/(# of output produced)
What are budget constraint lines and total utility?
Budget constraint line - the possible combinations of two goods that are affordable given a consumer's limited income Total utility - satisfaction derived from consumer choices. To understand how a household will make its choices, economists look at what consumers can afford, as shown in the budget constraint line, and the total utility or satisfaction derived from those choices.
What is a cartel and what is collusion?
Collusion - when firms act together to reduce output and keep prices high. They do this by: o holding down industry output, o charging a higher price, o and dividing the profit among themselves. Cartel - a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price.
Describe a situation involving a kinked demand curve
Consideramemberfirminanoligopolycartelthatissupposedtoproduceaquantityof10,000andsell at a price of $500. The other members of the cartel can encourage this firm to honor its commitments by acting so that the firm faces a kinked demand curve. If the oligopolist attempts to expand output and reduce price slightly, other firms also cut prices immediately—so if the firm expands output to 11,000, the price per unit falls dramatically, to $300. On the other side,if the oligopoly attempts to raise its price, other firms will not do so,so if the firm raises its price to $550, its sales decline sharply to 5,000. Thus, the members of a cartel can discipline each other to stick to the pre-agreed levels of quantity and price through a strategy of matching all price cuts but not matching any price increases.
What is constant cost industry, increasing cost industry, and decreasing cost industry?
Constant cost industry - as demand increases, the cost of production for firms stays the same. Increasing cost industry -as demand increases, the cost of production for firms increases. Decreasing cost industry - as demand increases the costs of production for the firms decreases
What are Constant returns to scale and diseconomies of scale?
Constant returns to scale - when expanding all inputs proportionately does not change the average cost of production. Diseconomies of scale - the long-run average cost of producing each individual unit increases as total output increases. o A firm or a factory can grow so large that it becomes very difficult to manage or run efficiently.
What is the Sarbanes-Oxley Act?
Designed to increase confidence in financial information provided by public corporations to protect investors from accounting fraud.
The five different short-run average cost (SRAC) curves represent what?
Different level of fixed costs, from the low level of fixed costs at SRAC1 to the high level of fixed costs at SRAC5. Other SRAC curves, not in the diagram, lie between the ones that are here.
What is a dupoly?
Duopoly - an oligopoly with only two firms.
What is the spectrum of competition?
Firms face different competitive situations. - At one extreme, perfect competition where many firms are all trying to sell identical products. - At the other extreme, monopoly where only one firm is selling the product, and this firm faces no competition. - Monopolistic competition and oligopoly fall between the extremes of perfect competition and monopoly. - Monopolistic competition is a situation with many firms selling similar, but not identical, products. - Oligopoly is a situation with few firms that sell identical or similar products.
What are the Lessons from Alternative Measures of Costs?
Fixed costs are often sunk costs that cannot be recouped. In thinking about what to do next, sunk costs should typically be ignored, since this spending has already been made and cannot be changed. Variable costs can be changed, so they convey information about the firm's ability to cut costs in the present and the extent to which costs will increase if production rises. Average Profit aka profit margin = price - average cost If the market price > average cost, then average profit will be positive. If price < average cost, then profits will be negative.
Enumerate all costs
Fixed costs-costs of the fixed inputs, like rent. o Expenditure that a firm must make before production starts o Do not change in the short run o Do not change regardless of the level of production. Variable costs-costs of the variable inputs, like labor, raw materials o Incurred in the act of producing - the more you produce, the greater the variable cost. Total cost - the sum of fixed and variable costs of production
What are Production technologies and Economies of scale?
Production technologies - alternative methods of combining inputs to produce output Economies of scale - the situation where, as the quantity of output goes up, the cost per unit goes down.
What can demand curve for financial market?
Savings behavior varies considerably across households. One factor is that households with higher incomes tend to save a larger percentage of their income. Another factor is personal preferences. Some people prefer to consume more now, and let the future look after itself. Others may wish to enjoy a lavish retirement, complete with expensive vacations, or to pile up money that they can pass along to their grandchildren. The theoretical model of the intertemporal budget constraint suggests that when the rate of return rises, the quantity of saving may rise, fall or remain the same, depending on the preferences o individuals.
What is the Shutdown point?
Shutdown point - the intersection of the average variable cost curve and the marginal cost curve. o If price < minimum average variable cost, then the firm shuts down o If price > minimum average variable cos, then the firm stays in business
What is Marginal utility?
The additional satisfaction gained from purchasing a good given the price of the product >> (marginal utility/price) The utility-maximizing choice between consumption goods occurs where the marginal utility per dollar is the same for both goods: MU1/P1 = MU2/P2
Does maximizing profit (producing where MR = MC) imply an actual economic profit?
The answer depends on the relationship between price and average total cost, which is the average profit or profit margin.
What is market structure?
The conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold.
Discuss legal monopolies in depth
The government creates barriers to entry by prohibiting or limiting competition. Examples of legal monopolies: o U.S. Postal Service o Utilities - electric, water, garbage, etc.
The long-run average cost (LRAC) curve represent what?
The lowest cost for producing each quantity of output when fixed costs can vary, and so it is formed by the bottom edge of the family of SRAC curves. If a firm wished to produce quantity Q3, it would choose the fixed costs associated with SRAC3.
How Do Changes in Income Affect Consumption Choices?
When income rises, the most common reaction is to purchase more goods, although exactly how much more of each good will vary according to personal taste. Normal goods - when a rise in income leads to a rise in the quantity consumed of the good; a fall in income leads to a fall in quantity consumed When income falls, the most typical reaction is to purchase less of both goods, UNLESS: Inferior goods - where demand declines as income rises (or conversely, where the demand rises as income falls) An inferior good occurs when people trim back on a good as income rises, because they can now afford the more expensive choices that they prefer (example: fewer hamburgers -> more steak)
What are the income effect and substitution effect?
The typical response to higher prices is that a person chooses to consume less of the product with the higher price: The substitution effect: when a price changes and consumers have a incentive to consume less of a good with a relatively higher price and more of the goods with a relatively lower price. The income effect: a higher price means, in effect, the buying power of income has been reduced (even though actual income has not changed) which leads to buying less of the good (when the good is normal) A higher price typically causes reduced consumption of the good in question, but it can affect the consumption of other goods as well.
What are Long-run average cost(LRAC) curves and Short-run average cost (SRAC) curves?
Long-run average cost (LRAC) curve - shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology. Short-run average cost (SRAC) curves-the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs.
What is behavioral economics?
Traditional economic models assume rationality, which means that people take all available information and make consistent and informed decisions that are in their best interest. They typically consider dollars to be fungible (having equal value to the individual, regardless of the situation). Behavioral economics takes into account people's state of mind: o Seeks to enrich our understanding of decision-making by integrating the insights of psychology into economics. o Investigates how given dollar amounts can mean different things to individuals depending on the situation. o This can lead to decisions that appear outwardly inconsistent, or irrational, to the outside observer.
Repeat the definition of oligopoly?
Oligopoly - when a small number of large firms have all or most of the sales in an industry. If oligopolists compete hard, they act similarly to perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other,they may act like a monopoly, and succeed in pushing up prices and earning consistently high levels of profit.
What is the break even point?
We can divide the MC curve into 3 zones, based on where it is crossed by the AC and AVC curves. * We call the point where MC crosses AC the break even point. * If the firm is operating where price > break even point, then price > AC and the firm is earning profits. * If the price = break even point, then the firm is making zero profits. Break even point - level of output where the MC intersects the AC curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits.
What is productive efficiency?
When profit-maximizing firms in perfectly competitive markets combine with utility -maximizing consumers, the resulting quantities of outputs of goods and services demonstrate both productive and allocative efficiency. Productive efficiency means producing without waste, so that the choice is on the PPF. In the long run in a perfectly competitive market, the price in the market is equal to the minimum of the long-run average cost curve. In other words, firms produce and sell goods at the lowest possible average cost.
What are cost curves?
https://commons.wikimedia.org/wiki/File:Costcurve_-_Combined.svg The information on total costs, fixed cost, and variable cost can also be presented on a per- unit basis: Average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. Average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is typically U-shaped or upward-sloping. Marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.
Why can a firm not avoid losses by shutting down and not producing at all?
o Shutting down can reduce variable costs to zero, but in the short run, the firm has already paid for fixed costs o As a result, if the firm produces a quantity of zero, it would still incur losses because it would still need to pay for its fixed costs
The shape of the long-run average cost curve has implications for what?
o how many firms will compete in an industry o whether the firms in an industry have many different sizes o or if they will tend to be the same size. (a) Low-cost firms will produce at output level R. When the LRAC curve has a CLEAR minimum point, then any firm producing a different quantity will have higher costs. In this case, a firm producing at a quantity of 10,000 will produce at a lower average cost than a firm producing, say, 5,000 or 20,000 units. (b) Low-cost firms will produce between output levels R and S. When the LRAC curve has a FLAT bottom, then firms producing at any quantity along this flat bottom can compete. In this case, any firm producing a quantity between 5,000 and 20,000 can compete effectively, although firms producing less than 5,000 or more than 20,000 would face higher average costs and be unable to compete.
What is a monopoly?
one firm produces all of the output in a market
Discuss marginal cost and revenues for the raspberry farm
● For a perfectly competitive firm, the marginal revenue curve is a horizontal line because it is equal to the price of the good ($4), which is determined by the market. ● The marginal cost curve is sometimes initially downward-sloping, if there is a region of increasing marginal returns at low levels of output. ● It is eventually upward-sloping at higher levels of output as diminishing marginal returns kick in.
What is a Backward-Bending Supply Curve of Labor?
Higher wages will sometimes cause an increase in hours worked, sometimes cause hours worked not to change by much, and sometimes cause hours worked to decline, has led to labor supply curves that are backward- bending The different responses to a rise in wages - more hours worked, the same hours worked, or fewer hours worked - are patterns exhibited by different groups of workers in the U.S. economy: Many full-time workers have jobs where the # of hours worked is relatively fixed, so their supply curve of labor is inelastic Part-time and younger workers tend to be more flexible in their hours, and more ready to increase hours worked when wages are high or cut back when wages fall
What are the disadvantages of imperfect compeition?
Monopolistic competition is probably the single most common market structure in the U.S. economy. o It provides powerful incentives for innovation, as firms seek to earn profits in the short run, while entry assures that firms do not earn economic profits in the long run o Firms do not produce at the lowest point on their average cost curves o Product differentiation may lead to excessive social expenses on advertising and marketing Oligopoly is probably the second most common market structure. o When oligopolies result from patented innovations or from taking advantage of economies of scale to produce a low average cost, they may provide considerable benefit to consumers. o Oligopolies are often buffeted by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. o Oligopolilsts also do not typically produce at the minimum of their average cost curves. o Without vibrant competition, they may lack incentives to provide innovative products and high quality service.
What is a natural monopoly and a legal monopoly?
Natural monopoly - where the barriers to entry are something other than legal prohibition. Legal monopoly - laws prohibit (or severely limit) competition.
How do you enforce cooperation in a oligopoly?
The way out of a prisoner's dilemma is to find a way to penalize those who do not cooperate. Oligopolists may choose to act in a way that generates pressure on each firm to stick to its agreed quantity of output. Kinked demand curve - a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases
Discuss how the a monopolistically competitive firms earns profit?
To maximize profits, the Authentic Chinese Pizza shop would choose a quantity where marginal revenue equals marginal cost, or Q where MR = MC. Here it would choose a quantity of 40 and a price of $16.
If a firm enters the market with a monopolistic competitor, what happens?
If one monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market. The entry of other firms into the same general market shifts the demand curve that a monopolistically competitive firm faces. (a) At P0 and Q0, the monopolistically competitive firm shown in this figure is making a positive economic profit. This is clear because if you follow the dotted line above Q0, you can see that price is above average cost. Positive economic profits attract competing firms to the industry, driving the original firm's demand down to D1. At the new equilibrium quantity (P1, Q1), the original firm is earning zero economic profits, and entry into the industry ceases. (b) In (b) the opposite occurs. At P0 and Q0, the firm is losing money. If you follow the dotted line above Q0, you can see that average cost is above price. Losses induce firms to leave the industry. When they do, demand for the original firm rises to D1, where once again the firm is earning zero economic profit.
Discuss shutdown points and price
If shutdown point < price < break even point, o the firm is making losses o but will continue to operate in the short run, o since it is covering its variable costs, and more if price is above the shutdown-point price. If price < shutdown point, then the firm will shut down immediately, since it is not even covering its variable costs.
What is Imperfectly competitive, Monopolistic competition, and oligopoly?
Imperfectly competitive - firms and organizations that fall between the extremes of monopoly and perfect competition Monopolistic competition - many firms competing to sell similar but differentiated products. Oligopoly - when a few large firms have all or most of the sales in an industry.
Discuss The Shutdown Point for the Raspberry Farm
In (a), the farm produces at a level of 50. It is making losses of $56, but price is above average variable cost, so it continues to operate. In (b), total revenues are $72 and total cost is $144, for overall losses of $72. If the farm shuts down, it must pay only its fixed costs of $62. Shutting down is preferable to selling at a price of $1.80 per pack.
What is Intellectual property and Deregulation?
Intellectual property - the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions. o Implies ownership over an idea, concept, or image, not a physical piece of property. Deregulation - removing government controls over setting prices and quantities in certain industries.
What does merger and acquisition mean?
Merger - when two formerly separate firms combine to become a single firm. Acquisition - when one firm purchases another.
What is Minimum resale price maintenance agreement and exclusive dealing?
Minimum resale price maintenance agreement - requires a dealer who buys from a manufacturer to sell for at least a certain minimum price. Exclusive dealing - an agreement that a dealer will sell only products from one manufacturer.
What are natural monopolies?
Natural monopoly arises when average costs are declining over the range of production that satisfies market demand. o Typically happens when fixed costs are large relative to variable costs. Most true monopolies today in the U.S. are regulated, natural monopolies.
What does concentration ratio and market share mean?
Regulators have tried to measure the degree of monopoly power in an industry. (Four-Firm) Concentration ratio - an earlier tool which measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms. Market share - each firm's proportion of total sales in that market.
What is the The Herfindahl-Hirshman Index (HHI)?
The Herfindahl-Hirshman Index (HHI) - approach to measuring market concentration by adding the square of the market share of each firm in the industry. In the 1980s, the FTC followed these guidelines: If a merger would result in an HHI of less than 1,000, the FTC would probably approve it. If a merger would result in a HHI or more than 1,800, the FTC would probably challenge it. In the last several decades, the antitrust enforcement authorities have moved away from relying as heavily on measures of concentration ratios and HHIs to determine whether a merger will be allowed, and instead carried out a more case-by-case analysis on the extend of competition in different industries.
How is the demand curve manifested with a perfectly competitive firm, monopoly, and oligopoly?
The demand curve faced by a perfectly competitive firm is perfectly elastic, meaning it can sell all the output it wishes at the prevailing market price. The demand curve faced by a monopoly is the market demand. It can sell more output only by decreasing the price it charges. The demand curve faced by a monopolistically competitive firm falls in between.
Discuss the supply and demand graph for the raspberry farm
The equilibrium price of raspberries is determined through the interaction of market supply and market demand at $4.00.
What is a key difference between perfectly competitive market and a monopolistic market?
The long-term result of entry and exit in a perfectly competitive market: o Firms sell at the price level determined by the lowest point on the AC curve. o Displays productive efficiency: goods are produced at the lowest possible average cost. In monopolistic competition, the end result of entry and exit: o Firms end up with a price that lies on the downward-sloping portion of the AC curve, not at the very bottom of the AC curve. o Thus, monopolistic competition will not be productively efficient.
How Does a Monopolistic Competitor Choose Price?
The monopolistically competitive firm decides on its profit- maximizing quantity and price in much the same way as a monopolist. A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve, It will choose some combination of price and quantity along its perceived demand curve.
What is the new way of measuring monopoly power?
The new approach to antitrust regulation involves detailed analysis of specific markets and companies, instead of defining a market and counting up total sales. It is done by: o estimating the demand curves and supply curves the firms proposing a merger face. o building a statistical model that estimates the likely outcome for consumers if the two firms are allowed to merge.
What is the maximum possible profit when looking at marginal revenue and cost?
For a monopoly like HealthPill, marginal revenue decreases as additional units are sold. The marginal cost curve is upward-sloping. The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. If the monopoly produces a lower quantity, then MR > MC at those levels of output, and the firm can make higher profits by expanding output. If the firm produces at a greater quantity, then MC > MR, and the firm can make higher profits by reducing its quantity of output. This figure begins with the same marginal revenue and marginal cost curves from the HealthPill monopoly presented in Figure 9.5. It then adds an average cost curve and the demand curve faced by the monopolist. The HealthPill firm first chooses the quantity where MR = MC; in this example, the quantity is 4. T The monopolist then decides what price to charge by looking at the demand curve it faces. The large box, with quantity on the horizontal axis and marginal revenue on the vertical axis, shows total revenue for the firm. Total costs for the firm are shown by the lighter-shaded box, which is quantity on the horizontal axis and marginal cost of production on the vertical axis. The large total revenue box minus the smaller total cost box leaves the darkly shaded box that shows total profits. Since the price charged is above average cost, the firm is earning positive profits.
How do monopolists analyze marginal profit?
Marginal profit - profit of one more unit of output, computed as marginal revenue minus marginal cost. In the real world, a monopolist often does not have enough information to analyze its entire total revenues or total costs curves. o The firm does not know exactly what would happen if it were to alter production dramatically. However, a monopolist often has fairly reliable information about how changing output by small or moderate amounts will affect its marginal revenues and marginal costs.
How do you calculate Marginal revenue (MR) and Marginal cost (MC)?
Marginal revenue (MR) - the additional revenue gained from selling one more unit. = (change in total revenue/ change in quantity) Marginal cost (MC) - the cost per additional unit sold. = (change in total cost / change in quantity) The profit-maximizing choice for a perfectly competitive firm will occur at the level of output where MR=MC.
What is marginal utility and Diminishing Marginal Utility?
Marginal utility - the additional utility provided by one additional unit of consumption = (change in total utility / change in quantity); Diminishes as additional units are consumed Diminishing marginal utility - the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
What is patent, trademark, copyright, and trade secrets?
Patent - gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time. Trademark - an identifying symbol or name for a particular good. Copyright - a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music. Trade secrets - methods of production kept secret by the producing firm
What is the Labor-Leisure Budget Constraint?
People do not obtain utility just from products they purchase; they also obtain utility from leisure time (time not spent at work) The decision-making process of a utility- maximizing household applies to what quantity of hours to work in much the same way that it applies to purchases of goods and services. Choices made along the labor-leisure budget constraint, as wages shift, provide the logical underpinning for the labor supply curve. Y is income and X is labor hours/leisure hours
What is perfect competition?
Perfect competition - each firm faces many competitors that sell identical products. 4 criteria: o many firms produce identical products, o many buyers and many sellers are available, o sellers and buyers have all relevant information to make rational decisions, o firms can enter and leave the market without any restrictions.
What is the Consumer equilibrium?
The ratio of prices of the two goods should be equal to the ratio of the marginal utilities MU1/P1 = MU2/P2