Econ Modules 10.1 & 10.2

entry deterrence strategies means convincing possible rivals that if they enter you will bo so aggressive they will wish they had not through credible threats:

1) build excess capacity so that rival expect competition: you are committing to your company and being invested in your infrastructure to win 2) financial resources signal you can survive a costly fight 3) brand proliferation can ensure their is no niche for rivals: dozens of cereals made by few companies 4) good reputation

how to use firms demand curve to to map out tradeoffs

1) find marginal revenue with chart

marginal revenue lies below demand curve since

1) if you have market power you can raise your price a bit to sell extra items 2) due to discount effect your marginal revenue from selling one more is less than the price you charge os marginal revenue curve lies below demand at the amount of the discount rate 3) discount effect is bigger when you sell a larger quantity because a price cut for many customers reduces revenue more resulting in the gap between the firms demand curve and marginal revenue curve to widen as quantity sold increases

As the quantity sold rises for a seller in imperfect competition, what happens to the difference between price and marginal revenue?

It gets larger and larger.

oligopoly and monopolistic competition are imperfect competition that are price makers who

figure out the price that best exploits their market power

to discover your firms demand curve experiment with

prices by offering different prices to different customer groups or different store locations

four strategics companies use to deter new entrants

1) demand side strategies 2) supply side strategies 3) gov policy 4) entry deterrence strategies

Which statement describes a monopoly?

A single firm produces a product with no close substitutes and control over the market price.

market power reduces

Consumer surplus

optimal price for imperfect competition

FDC = MC

A company produces a particular cell phone that requires accessories (such as chargers, cases, and ear plugs) that are specific to that phone and cannot be used with phones manufactured by other companies. The company that produces this cell phone is using what strategy to create a barrier to entry?

Increasing switching costs to ensure demand for its product.

optimal quantity for imperfect competition

MRC = MC

Which of the firms is most likely to be a natural monopoly?

Municipal Power Light, the local supplier of electricity.

perfect completion firms produce

at minimum average total cost

When a product is characterized by network effects, then the product _____ when more customers use the product.

becomes more valuable to each customer

tailer business strategies to the specific

competitive environment

market power is bad for society since it

creates market failure because it lead to a smaller quantity to be produced that is no tin society best interest but the firm managers profits the most

market power causes

deadweight loss

with market powers managers supply less because of the

discount effect they are reluctant to lower price because it means less revenue from existing customers

market power yields larger

economic profit since managers choose to charge price higher than in perfect competition (they choose the high price low quantity path)

Perfect competition achieves allocative efficiency because the market price is

equal to firms marginal costs

oligopoly

few competitors/ products can be same or differentiated/ some barriers to entry/ ex: smartphone market

market power determines the shape of

firms demand curve

Which of the following government policies would create a direct barrier to entry for new sellers in a market?

granting a patent to the developer of a new product

A monopoly outcome usually fails to be allocatively efficient because the market price is

greater than the marginal cost

businesses with market power can survive with

high costs since their high profits makes managers feel less pressured to adopt cost saving practices

output effect

higher output raises revenue/ (price) x (price of extra item you sell)

market power leads to

higher prices

more markets means more

inelastic demand since you can raise prices with out loosing customers since your firm has no or little substitutes

price makers by selling more or less have

influence over the price in the market

The negative outcomes of market power include all of the following EXCEPT

lower prices

business face a trade off between selling a larger quantity of items or

making more on each item

perfect competition

many competitors/ identical products/ no entry barriers/ price takers

A seller's incentive to increase production is reflected in its

marginal revenue curve.

in a monopoly the firms demand curve equals the

market demand curve since quantity demanded for your firm equals the quantity demanded in the whole market

monopolistic demand is not perfectly elastic their demand is same as

market demand so people willingness to pay for that product is the same as their willingness to buy from that company

monopoly

no competitors/ one unique product/ barriers to entry

barriers to entry

obstacles that make it difficult for new businesses to enter the market

A certain city has four hospitals, and there are no other hospitals within 200 miles. Two of the hospitals are more specialized than the other two because one has a large cardiac unit and the other has a specialized cancer-treatment center. The local market for hospital services is what type of market?

oligopoly

increasing competition can lead to better

outcomes

deciding to sell one more unit leads to

output effect and discount effect

perfect competition has a

perfectly elastic demand curve

competition lowers

prices and increases quantity

market power increases

produce surplus by transferring some consumer surplus to it

rational rule for sellers

sell one more until marginal revenue = marginal cost

market power leads to bad outcomes since

sellers exploit market power

how does a monopoly chose price and output

set marginal revenue = marginal cost

with imperfect competition your firms demand curve can be

steep or flat depending on how much market power you have

firms demand curve (FDC)

summarizes market power and marginal revenue curve

market structure shapes your market power:

the ability to raise your prices without loosing many sales to competing businesses (more market power means the higher price you can charge)

free of market power is determined by

the number of competitors/ level of product differentiation/ barriers to entry

discount effect

to sell one more unit, you have to lower the price on all units sold/ (change in price x quantity) x (price cut x quantity that gets price cut)

a monopoly usually fails to reach productive efficiency because the monopolist produces

where average total cost is greater than marginal costs

All of the following government policies would create a barrier to entry in a market EXCEPT:

a requirement that there can be no switching costs for consumers.

Following the Rational Rule for Sellers, how does output for a seller who has market power compare to output for a seller who does not have market power?

Output is higher without market power than with market power.

Are positive long‑run profits possible under this market structure?

Positive long run economic profits are possible if barrriers to entry remain high.

Which of the following is NOT a strategy used by a company to "lock-in" customers to ensure demand for its product?

Pressuring the government to require a license for entry into the market

Most U.S. grocery stores sell a variety of boxed breakfast cereals. This observation indicates that the boxed breakfast cereal market is

a monopolistically competitive market

supply side demand strategies develop unique cost advantages that new commoners cannot replicate since few entrepreneurs will enter a market where existing firms have low costs/ done through:

1) learning by doing means that experience yields efficiency gains: as you gain experience making product you learn to be more cost efficient 2) benefits from mass production can keep small firms from being entrants: mass production is more efficient but requires expensive machines small companies cannot afford 3) research new ways of organizing the workplace to lessen costs 4) relationships with suppliers can give cheaper inputs: larger business profits suppliers so firm can demand discounts 4) access to key inputs can freeze your competitors out: tying up key inputs through long term contracts makes it difficult for new ones to succeed

five key insights into imperfect competition

1) market power allows you to pursue independent pricing strategies (what price give you most power and profit?) 2) more competitors means less market power so in the long run profit depends on how many rivals 3) successful product differentiation gives you more market power 4) imperfect competition among buyers gives them bargaining power (mangers must keep valuable clients since they can demand lower prices) 5) your best choice depends on the action that other businesses make (depends on interdependence: your price depends on rivals)

regulatory gov polices

1) patents give you the right to be the only producer for a new innovation 2) regulations make it difficult for new entrants 3) compulsory license can limit competition: gov directly regulates market entry 4) lobbying creates new regulatory barriers: lobby with the government in hopes gov will implement rules that will interfere with plans of new entrants

demand side strategies create customer lock in through:

1) switching costs: any impediment that make sit difficult and costly for customers to switch companies 2) reputation and goodwill keep customers loyal 3) network effect means whenever a product becomes more useful when others also use it

What is a natural monopoly?

A monopoly that faces a high fixed cost and low marginal costs so that the average total cost curve slopes downward.

the more you want to sell the more you lower the price so marginal revenue curve declines more steeply than

demand curve

monopolistic competition

many competitors/ differentiated products/ low barriers to entry/ ex: restaurant industry

A firm's ability to raise its product price without losing many customers to competing businesses is known as

market power

moving away from perfect competition means companies have different

market power

marginal revenue curve

measures your incentive to increase production