Micro Econ- Test 3

opportunity cost in labor markets

"or what" you could hire another person, or you could keep cost and production at current levels

in nash equilibrium there are 2 things...

1. best response 2. correct response (the equilibrium outcome is not always the best response)

how to plot marginal revenue

1. calculate total revenue (= PxQ) 2. asses marginal revenue (change in total revenue from selling one more unit) 3. plot results

3 solutions to solving coordination problems

1. communication 2. focal points, culture, and norms 3. laws and regulations

four steps to making a good strategic decisions

1. consider all possible outcomes 2. think about the "what ifs" serparatly 3. evaluate your best response 4. put yourself in someone else's shoes

5 insights to imperfect competition

1. having more competitors leads to less market power 2. market power allows you to pursue independence pricing strategies 3. successful product differentiation gives you more marker power 4. imperfect competition among buyers gives them barganing power 5. your best choice depends on the actions of other businesses

barriers to entry

Obstacles that make it difficult for new firms to enter a market

focal point

a cue form outside the game that helps you coordinate on a specific equilibrium (e.g. lunch is at 12pm if not specified)

income effect

a higher wage increase in your income leads you to choose more leisure and hence, less work (labor demand curve in downward sloping)

substitution effect in labor supply

a higher wage increases the returns to work relative to leisure, leading you to work more (labor demand curve is upward sloping)

natural monopoly

a market in which it is cheapest for a single business to service the market

prune tree method

a method for solving game trees: Start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose—the "dead leaves"—off your game tree.

play off table

a table that isn't your choice in each row, the other player's choices in each column, and shows you all possible outcomes... listing the playoffs in each cell

economic profit =

accounting profit - implicit costs

explicit cost

actual cash payments

simultaneous games

all players make their choices without knowing what choice the other has made

what does game tree show?

all possible outcomes can play out overtime

collusion

an agreement by rivals to limit competition between each other

Nash Equilibrium

an equilibrium in which the choice that each player makes is a best response to the choices other players are making

switching cost

an impediment that makes it costly for customers to switch to buying another business

marginal principle for labor supply

asking the question "how many hours should i work" and "should i work one more hour"

backwards bending supply curve

at higher prices the income effect dominates, but at lower prices the substitution effect dominates

underproduction problem

business with more marker power supply less than the efficient quantity

price taker

buyers or sellers who take market price as given and charging the market price

average cost

calculated as your firm's total cost (including fixed & variable), or cost per unit manufactured

if a monopolistic produces a quantity that generates MC<MR then profit...

can be increased by increasing outputs

marginal cost

change in the total cost (or VC) when you produce another item

shift in demand curve happens when

changes in demand of your product

first mover advantage occurs when you...

commit to being aggressive

supply-sided strategies include...

cost advantages, better supplier relations, and limiting access to key inputs for other competitors

implicit cost

cost that affect decisions but no money charges (opportunity cost)

when non-wage cost rise, then the labor demand will...

decrease with any given wage (left shift in labor demand curve)

entry into markets

decreases your demand, shifts left, and you lose market power

4 types of barriers to entry

demand-sided, supply-sided, regulatory, and deterrence strategies

what does a firm's demand curve show?

determines market power and summarizes your marginal revenue curve

free entry pushes prices _______ toward _______

down, average cost

labor demand is

downward sloping because of diminishing marginal product

average fixed cost graph

downward sloping because of the spreading effect

improves management/ technology changes that increase the production of labor means...

each worker can produce more per week

if there is free entry or exit then in the long run...

economic profits will be eliminated and price will equal average cost (economic profit = $0)

product differentiation

efforts by sellers to make their products differ from their competitors. this can add market power

rational rule for entry

enter a new market if you expect to earn a positive economic profit, which occurs when the price > average cost (AC)

average revenue

equal to the price, if you charge everyone the same price

rational rule for exit

exit a market if you expect to earn a negative economic profit, which occurs if the price < average cost (AC)

oligopoly characteristics

few competitors and same or differentiated products

moving second can be an advantage when...

flexibility is important

patent

gives an inventor the right to be the only seller of the good they invented for a period of time

average variable cost graph

goes down and then up in a u-shape

if each additional worker is generating more revenue for you, then you should...?

higher more workers

substitution effect says that...

higher wages make work relatively more attractive

the income effect says that...

higher wages makes leisure more attractive

rational rule for employers

hire one more worker if that extra worker's marginal revenue product is greater than (or equal to) the wage

cost-benefit in labor markets

hire one more worker only if that extra worker yields a higher marginal benefit than marginal cost

firm demand curve

illustrates how to quantity that buyers demand from an individual business or firm values as it changed the price it changes

look forward

in games that play out over time, you should look forward to anticipate the likely consequences of your choices

exit from markets

increase your demand, shifts right, and you gain market power

when income and substitution effect offset each other

its a vertical line

wage is the principle of...

labor (vertical axis)

competition policy

laws and regulations designed to ensure that markets remain competitive

competition policy (antitrust policy)

laws and regulations designed to ensure that markets remain competitive.

perfectly competitive labor market

lots of businesses looking to hire from a pool of many workers with similar skills

monopolistic competition characteristics

many competitors and differentiated products

perfect competition characteristics

many competitors and few products

marginal revenue product=

marginal product of labor x price

marginal benefit of labor=

marginal revenue product (marginal product of labor x price)

maximize your profits when

marginal revenue product = wage

average cost determines profitability of the....

marginal supplier

oligopoly

market with few large sellers

imperfect competition

markets featuring few competitors, but with sufficiently limited competition that sellers still have market power

monopolistic competition

markets with many small businesses competing, each selling differentiated products

why are mergers not beneficial?

may lessen competition or tend to create a monopoly

marginal revenue product

measure the marginal revenue from hiring an additional worker

profit margin

measures your profit per unit sold

scale effect requires...

more workers and increasing production and labor demand

monoploy characteristics

no competitors and unique products

perfect competition has...

no market power

marginal revenue =

output effect (P) - discount effect (∆P x Q)

regulatory strategies include...

patents, regulations to entry, government license, and business lobbying to create new regulatory barriers

market power in order (least to greatest)

perfect competition, monopolistic competition, oligopoly, and monopoly

short-run

period of time in which the production capacity and the number/type of competitors you face cannot change

long-run

period of time in which you, or your rivals, may expand or contract production capacity, and new rivals may enter or exit

sequential games

players make decisions one after another, so one player responds to the known decisions of other players

positive for consumers to merger laws

positive: mergers might create cost savings and eventually feed into lower prices

profit margin =

price - average cost

in perfect competition one must be a...

price takers

checkmark method

putting a checkmark next to each player's best response on the play off table to find the nash equilibrium

hours of work measures the...

quantity of labor (horizontal axis)

changes in price of capital

scale effect, substitution effect, better management/production gains, and non-wage benefits (subsidies and taxes)

preditory pricing

selling a product below cost to drive competitors out of the market

marginal principle in labor markets

should you hire one more worker?

game tree

shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes

reason backwards

start by analyzing your last period of the game. use this to figure out what will happen in the second-to-last choice and keep reasoning backwards until you can see all the consequences that follow from today's decision

the prisoner's dilemma is a....

striking counterpoint to the idea that free markets deliver the best outcomes

demand-sided strategies include...

switching cost, customer loyalty, and networking effects

marginal revenue

the addition to total revenue you get from selling one more unit

best responce

the choice that yields the highest payoff given the other player's choice

opprotunity cost principle for labor supply

the cost of paid work is forgoing the time spent on leisure

derived demand

the demand for an input is derived from consumers' demand for the good or service produced with that input (an increase in demand for what you sell causes an increase in demand for workers/labor demand)

economic profit measures... on a graph

the distance between your benefits and your cost

market power

the extent to which a seller can charge a higher price without losing many sales to competing businesses

marginal product of labor

the extra output you produce from hiring an extra worker

the more market power you have...

the higher price you can charge

what prevents a firm from being able to reduce the discount effect as they lower their prices?

the inability to change different prices to different customers

discount effect

the price cut you'll have to offer x the quantity that gets that price cut

output effect

the price of the extra item you sell

second mover advantage

the strategic advantage that can follow from taking an action that adapts to your rival's choice

first-mover advantage

the strategic gain from an anticipatory action that can force a rival to respond less aggressively

labor supply

the time you spend working in a market

if scale effect dominates...

then labor and capital are compliments (decrease in price of capital will cause a rightward shift in labor demand curve)

if substitution effect dominates...

then labor and capital are substitutes (decrease in the price of capital will lead to a leftward shift in labor demand curve)

free entry markets

there are no factors making it particularly difficult or costing for a business to enter or exit an industry

leisure time

time not spent at work/working (any unpaid work)

average cost =

total cost/quantity

accounting profit =

total revenue - explicit costs

profit =

total revenue - total cost

average revenue (price) =

total revenue/quantity

average cost graph

u-shaped

free exit pushed prices _______ toward _______

up, average cost

marginal cost of labor=

wage

coordination game

when all players have a common interest in coordinating their choices

scale effect

when price of capital goods (or anything) decline, your business can produce output at a lower price

substitution effect

when the price of machines fall, the demand for workers (to do that same task can be substituted for machines) decreases

multiple equilibria

when there is more than one equilibrium

monopoly

when there is only one seller in the world

strategic interactions

when your best choice depends on what others choose, and their best choice may depend on what you choose

anti-coordination game

when your best response is to take a different (but complementary) action to the other player

perfect competition

where all firms sell the same good, and there are many buyers and sellers

labor markets

where wages and employment are determined by the intersection of the downward-sloping labor demand curve and the upward-sloping labor supply curve

rational rule for workers

work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure

negatives for consumers to merger laws

yields greater market power for new "mega" companies

cost-benefit principle for labor supply

you should work one more hour if the wage is greater than the marginal benefit for leisure

moving first can be useful when...

you want to commit to a particularly aggressive strategy