Chapter 14 (Lecture & Readings)
"Natural water/electric/gas monopoly, government will force them to charge a competitive price which prevent them from adjusting ______ and _____
$; quantity
Imperfect Competition, Key Insights (5) 1. Firms is not price taker | can charge different customers different prices
1. Market power allows you to pursue independent pricing strategies 2. Having more competitors leads to less market power 3. Successful product differentiation gives you more market power 4. Imperfect competition among buyers gives them bargaining-power 5. Best choice depends on the actions that other businesses make
Imperfect Competition, Include (2) 1. Before "many competitors" but with ______ results in ____ competitors 2. Before "identical product" but with ______/differentiated product resulted in _______ product
1. Oligopoly, no 2. Monopolistic Competition, unique
Government Regulations that Regulate Market Powers 1. _____ that will set the price to equal the _____ and eliminate the ____ and underproduction problem 2. _____ trade 3. ____ licensing regulations
1. Price ceiling; MC; discount effect 2. Free International 3. Eliminate
Some Market Power (Concept Definition)
1. Raise prices a bit that's higher than their marginal cost 2. Lose some not all customers to rival
Output Effect, Formula
= Price
Market Power (Concept Definition)
Ability to charge higher prices without losing many sales to competing businesses
Oligopoly & Cartels, Result Produce: Lower quantity at higher price
Act as if they were a monopoly
Marginal Revenue Curve, Definition
Addition to total revenue you get from selling one more unit.
Collusion, Definition
An agreement to limit competition
Marginal Revenue, Graph
Below the demand curve and declines faster
"More competition yields _____ outcomes for society
Better
(END) Market Power (Concept)
Business try to differentiate their products
Discount Effect, Formula
Change in price * quantity
(END) Market Power (Impact)
Charge higher prices = Sell smaller quantities = Earn larger profits = Survive high costs
Types of Market: Perfect Competition, Definition Graph: Firm demand is a horizontal line and market demand is - slope relative steep Additional Information: market share does not influence price, companies are able to enter or exit without barriers, buyers have perfect or full information, and companies cannot determine prices
Companies sell (1) identical products, (2) all the sellers/buyers are small relative to size (3) Sellers have no market powers they must accept market price and can only adjust quantity produced
"International trade fosters _____
Competition"
"How do businesses figure out what price they can charge: they analyze their (1) _____ and (2) ______
Demand curve by trying out different prices and track sales to manually plot; calculate marginal revenue to determine quantity produce
"Market demand gets steeper when the firm _____ their product in market power
Differentiate (charge higher prices)"
Product Differentiation, Definition
Efforts by sellers to make their products different from those of their competitors
Types of Market: Monopoly, Definition Graph: Market demand = firm demand (e.i natural gas)
Enterprise that is the only seller of a good or service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit
"Negative demand curve slope = Market power ____
Exists"
How to Create a Demand Curve: - Overview: _____ with $ to discover people's willingness to pay (every 10 years) 1. Offer different prices to different groups of consumers 2. Offer different prices at different location 3. Offer different price over time (unannounced sales)
Experiment
(END) Market Power (Definition)
Extent (bend their demand curve) to which seller can charge a higher price without losing many sales to competing businesses
Market Power, Definition
Extent to which a seller can charge a higher price without losing many sales to competing businesses
Marginal Cost (Concept Definition)
Extra costs of producing one more unit
Marginal Revenue (Concept Definition)
Extra revenue you get from that extra sale (producing one more unit)
(END) Market Power, How They Set Prices (Concept)
Firms set quantity at the point which MC = MR and then look up to demand curve to set price
"When there is no differentiation the firms demand curve is ____ and is a _____ competition
Flat, perfect
Market Power, Issues
Higher prices and the reduced quantity (optimal amount if were in an perfect market)
"Issue that economist have with market power is that
Higher prices mean fewer sales, and therefore, fewer people can benefit from buying and using the product"
"Firms that have higher market power can set ______
Higher prices"
"Market powers leads to
Higher prices"
(END) Market power allows businesses to charge a price that is
Higher than their marginal cost
"Quantity when we have perfect competition is ____
Higher"
"Deadweight loss at the left means that people are willing to pay ____ prices, this allows producer surplus to _____
Higher; increase"
Output Effect, Rough "Revenue increase from selling one more unit"
How many consumers you have gained
"Two factors that determine market power
How many rivals there are; how unique the product is"
Discount Effect, Rough "Revenue loss from cutting the price on all the previous units sold"
How much money you are losing by bringing down the price by the people who would've been willing to pay more
"Price-fixing between companies is _____ as regarded by government and will fine them
Illegal"
"Patents provide an ___ to engage in research
Incentive"
"Imperfectly competitive markets when gov introduces a price ceiling this will _____ economic surplus
Increase
"Introducing government regulations into a monopoly will _____ dwl and shift left the _____ curve and hence shrink the _____ surplus
Increase; demand; consumer"
Rational Rules for Sellers (Concept)
Keep producing until your marginal revenue is equal to your marginal costs
(END) "Public policy can't eliminate market power, but it can
Limit abuses"
(Practice Question) The price in perfect competition is _____ than the price under imperfect competition. The quantity under imperfect competition is _____ than the quantity under imperfect competition
Lower; higher
"Competition leads to _____ prices and _____ quantity
Lower; higher"
"Businesses will choose when
MC = MR"
Marginal Revenue Value, Formula
MR = P - (DeltaP * Quantity)
(Practice Question) What is the relationship among marginal revenue, marginalcost, and price in a firm with market power?
Marginal cost = Marginal revenue < Price
Underproduction Problem, Concept
Market power leads businesses to produce a lower quantity and sell at a higher price
"Product differentiation yields ______
Market power"
"While the demand curve tells us different sets of prices and sale, what's important is amount of customers lost which is dependent on
Market power"
(END) "Shape of a firms demand curve depends on the
Market structure"
"Structure that has the most market power is _____ because they are the only businesses that sell a _____ product"
Monopolist, unique"
"The more slope your demand curve (more inelastic) the _____ market power
More"
Spectrum of Market Power, Line Graph (Extremes)
Most: Monopoly Least: Perfect Competition
Marginal Revenue (Concept)
Net effect between discount effect and output effect. That is the consideration after lower prices due to increase in quantity is seen as a loss (discount effect) but the gain (output effect) additional money they receive via increase in quantity
Factors Affects Market Power #1
Number of competitors you have; consumers have more options and the price of product can be raised
"Largest oligopoly is ____ they come together and determine the output of oil and their _____
OPEC; price"
Monopoly (Concept Definition)
Only one seller and won't be worried about selling at higher price because there are no more rivals
(END) Marginal Revenue w. Market Power (Equation)
Output effect - Discount effect
"Monopolies fear is what
People might choose to do without instead"
(Practice Question) Which of the following market structures has theflattest firm demand curve, all else equal
Perfect competition
"Structure with least market power is ______
Perfect competition"
"No slope on demand curve = ___ (____ market power)
Perfect competitive; no"
Anti-Collusion, Definition
Prevent business from agreeing not compete
Merger Laws, Definition
Prevent competing businesses from combining to consolidate market power
"Perfect competition firms are the _____
Price takers"
Factors Affects Market Power #2
Product differentiation; describe your efforts to distinguish your products from others which allows you to charge more
"When you have some market power the profit is your _____ or markup on each unit, multiplied by the number of sales you make
Profit margin"
Firm Demand, Definition
Quantity demand from your firm
Market Demand, Definition
Quantity demanded across all firms
Individual Demand, Definition
Quantity demanded by a single buyer
"Perfectly competitive markets when gov introduces a price ceiling this will _____ economic surplus
Reduce"
Patent, Definition
Register an idea at the patent USA office for over 20 years that no one else can recreate
"Goal of a business it not to maximize their ____ but their _____
Revenue; profit"
"Amount of market power you have determines how much raising the price will boost profit margin and not reduce as many number of
Sale"
Trade-Off Btw Price and Quantity: "As you lower the price you can
Sell larger quantities"
Types of Market: Oligopoly, Definition Graph: OPEC's demand is physically smaller line steeper a little to the left of the market demand
Several producers coming together acting as one monopoly to have power to set price and quantity
Market Structure, Importance
Shapes your market power
Types of Market: Monopolistic Competition, Definition Graph: Firms demand is at the left of the market demand curve they both have low steep slopes
Small businesses compete and try to differentiate their product by convicting consumers why they are the better option. Sellers have some market power
"Increase market power by creating a
Stand out service or provide a product thats unique
Rampant Cheating: "In oligopoly and cartels, there is ____ for each firm to cheat and ____-produce. This will cause $/quantity to approach the perfectly competitive level
Strong incentive; over"
Firm Demand-Curve, Definition
Summarize the quantity that buyers demand from an individual firm as it changes its price
Marginal Revenue Curve, Formula
The change in totalrevenue from selling one more unit
Output Effect (Concept)
The price that a company would charge as they consider to shift the quantity they sell
Imperfect Competition, Definition
The situation of facing at least some competitors and/or selling products that differ at least a little from those of competitors
Natural Monopoly (Concept) Governments mandate a certain price so that smaller companies don't have to have overly high average total cost that are not fair compared to large companies
They bigger companies get the cheaper they can produce
Price Takers (Concept Definition)
They take the equilibrium price set by the market and they just follow it
"MR is ____ as steep as demand curve"
Twice
"Force of competition helps society as it leads for good outcomes but businesses try to increase their market power which
Weakens the force of competition"
Marginal Revenue Curve, Rough "Output effect minus the Discount effect"
What is the change in total revenue
Cartels, Definition
When firms collude, and agree to restrict output and charge higher prices
Perfect Competition (Concept Definition) Example: Wheat in the global market
When there a ton of buyers and sellers of an identical good, which leads for all companies to sell at the same price equilibrium (lowest cost they can produce)
Deadweight Loss (Graph Concept)
- Pc: competitive price - Consumer Surplus: Under the demand curve until PC - Producer Surplus: Above MC (supply curve)
Public Policy to Restrain Market Power, Regulations 1. Laws that ensure that ______ thrives 2. Laws that minimize the harmful ways that businesses might ______ their market power
1. Competition 2. Exploit
Market Power vs Perfect Competition, Comparison (5) 1. M.P leads to ___ prices 2. M.P leads to inefficiently ____ profits 3. M.P yields _____ economic profit 4. Businesses with market power can survive even within efficiently _____ costs
1. Higher 2. Smaller 3. Large 4. High
Setting Prices & Quantities: 1. Keep selling until your MR = ___ (accordance to the rational rule for _____) 2. Set your price on the demand curve (not on the _____ curve)
1. MC; seller 2. Marginal revenue