Econ Chapter 7 & Vocab
What causes imperfect competition?
A market that is perfectly competitive has a large number of firms. A market that is hard to enter is not perfectly competitive. Barriers to entry include high start-up costs and high levels of skill needed to enter the market.
The controller of a monopoly sets the price of goods by charging
A monopoly will maximize profits by setting the price at the point where marginal revenue equals marginal cost.
Why might the government give a drug company a patent?
A patent allows a company to make up for the money it spent in developing a product.
Give an example of a commodity?
A product that is considered the same no matter who makes or sells it, such as gasoline, is a commodity.
laws that encourage competition in the marketplace
Antitrust laws
formal organization of producers who agree to coordinate prices and production
Cartel
Inventions such as cellular phones can affect the government's antitrust policies because
Cellular phones challenged the natural monopoly of local phone service and reduced the need for regulation.
illegal agreement among firms to divide the market, set prices, or limit production
Collusion
product that is considered the same no matter who produces or sells it
Commodity
What might a pencil company do if it wants to compete without changing its prices?
Companies can change the physical features of a good to make it different. They can change the color, size, shape, or taste of a good.
removal of some government controls over a market
Deregulation
the government no longer decides each company's place in the market
Deregulation
Cartels usually do not last long. Why?
In a cartel, every member agrees to make a certain amount of goods. If any member breaks this agreement, prices fall. Then the cartel loses money.
In a perfectly competitive market, how much control over prices do companies have?
In a perfectly competitive market, no single seller controls supply or prices.
Give an example of an oligopoly?
In an oligopoly, a few large firms dominate the market. So economists usually say if the four largest firms produce at least 70 to 80 percent of the output, that's an oligopoly.
A major characteristic of monopolistic competition is that prices will be
In monopolistic competition, companies have some control over price since their products are similar, but not identical. So prices will be higher than in perfect competition, but not as high as in a monopoly.
Which of the following firms would show an average total cost curve like the one shown on the graph? a. a shoe store that replaces all employees with minimum wage employees b. a ranch that expands its herd from 400 to 800 cattle without adding land c. a restaurant that begins to charge customers $1 for a glass of water d. an Internet access company that varies its rates depending on the time of day
In order to increase profits while increasing output, costs must fall. In this case, the fixed costs are spread out among more goods as the output rises.
market structure in which a few large firms dominate a market
Oligopoly
when a few large firms control a market
Oligopoly
A government deregulates its airlines. What is likely to happen next?
When a government deregulates an industry, the government removes some of its controls.
factor that makes it difficult for a new firm to enter a market
Barrier to entry
group of producers who agree to set prices and quantities made
Cartel
In a perfectly competitive market, describe output
In perfect competition, output will reach a point where each supplying firm just covers all of its costs.
contract that gives a single firm the right to sell its goods within an exclusive market
Franchise
Who would the U.S. government allow to have a monopoly?
The government can limit competition by allowing patents on new products.
The government claimed that, to illegally extend its control over the market, Microsoft had used
The government claimed that Microsoft was engaging in predatory pricing by giving away its browser for free and requiring that it be included with its operating system software.
Before government approves a merger, companies must prove that the merger would
The government has the power to prevent the formation of monopolies by blocking mergers that might reduce competition and lead to higher prices.
Before approving a merger, what does the government try to predict?
The government tries to predict what effect a merger will have on prices and services.
What can the government do to keep monopolies from being formed?
To prevent monopolies from forming, the government can block mergers
Which is a real-life example of a market that is close to perfect competition?
At a farmers' market, the goods are all the same, and there are many buyers and sellers. For example, one farmer's beets are the same as another farmer's beets.
Building a video store near a grocery store is an example of which type of nonprice competition?
Building a video store near a grocery store is an example of using location to compete with other video stores.
a company joins another company or companies to form a single firm
Merger
when two or more companies join to form a single firm
Merger
Why is milk considered a commodity?
Milk is a commodity because it is the same no matter who sells it.
market structure in which many companies sell products that are similar but not identical
Monopolistic Competition
when many companies sell goods that are similar but not exactly the same
Monopolistic Competition
Which describes a company using nonprice competition to sell jeans? a. The company tells how its jeans are better than other jeans. b. The company makes its jeans exactly like other jeans. c. The company moves all of its stores away from other jeans stores. d. The company sells its jeans for much less than other jeans.
Monopolistic competitive sellers show how their product is better than the competitors.
when one seller controls the market
Monopoly
Why are there relatively few markets in which there is perfect competition?
Most markets have significant barriers to entry.
market that runs most efficiently when one large firm supplies all of the output
Natural Monopoly
license that gives an inventor the right to sell a good without competition
Patent
license that gives the inventor of a new product the exclusive right to sell it for a specific period of time
Patent
Patents are a form of monopoly that society allows because they
Patents allow a temporary monopoly that encourages firms to develop new products.
when a large number of firms sell the exact same good
Perfect competition
Which market structure is easiest for a newcomer to enter?
Perfect competition has the fewest barriers to entry.
Why is perfect competition considered the simplest market structure?
Perfect competition, sometimes called pure competition, is the simplest market structure because a large number of firms produce basically the same product at the same price, restricting the decisions and influence they have on the market.
selling a product below cost for a short period of time to drive competitors out of the market
Predatory Pricing
setting the market price below cost for the short term to drive competitors out of business
Predatory pricing
government set maximum or minimum prices
Price Controls
grouping consumers based on how much they will pay for a good
Price discrimination
Why do companies practice price discrimination?
Price discrimination allows suppliers to charge different prices to different groups of people. This allows the supplier to set the price for each group at the maximum each group is willing to pay.
What is price discrimination?
Price discrimination occurs when companies charge different prices to different groups of people. The company sets the price at the highest level each group is willing to pay.
A discounted airline fare is a price discrimination that can be offered because
Price discrimination sets different prices for different groups who are willing to pay them. Discounted fares can be offered because vacationers or other customers are willing to put up with restrictions, such as advance purchase or Saturday night stays.
an agreement among firms to sell goods for the same price
Price fixing
SKIP
SKIP
costs new businesses have before they can make goods
Start-up costs
expenses new businesses must pay before they can begin to produce and sell goods
Start-up costs
an illegal grouping of companies that discourages competition
Trust
What happens to an industry when the government deregulates it?
When the government deregulates an industry, the government removes some of its controls.
How is monopolistic competition mainly different from perfect competition?
In perfect competition, products are identical. In monopolistic competition, products are slightly different, and sellers can profit from those differences.
Describes complete barriers to entry in a monopoly?
A barrier to entry is a condition that prevents other companies from joining the market. If the barrier is complete, then one company has complete control over the market to such an extent that no one else can compete in that market.
Two companies merge to gain market power. What happens next?
A company with market power has the ability to set prices and output for the industry.
What happens when a company gains market power?
A company with market power has the ability to set prices and output for the industry.
government policies that keep firms from controlling the price and supply of important goods
Antitrust laws
factors that cause a producer's average cost per unit to fall as output rises
Economies of Scale