Econ final
marginal revenue
additional revenue a firm gets from one more unit (MBfirm)
firms maintain profit
as long as they have lower costs than the marginal firm
product positioning
how a firm differentiates its products relative to competing ones
wealth
how many assets (cars, homes, savings, stocks) you have
annual income
how much per year you make which varies so is not a great measure of consumption decisions
reputation and goodwill
make customers loyal by treating them well
regressive taxes
people with less money pay a higher share of their income (ex: sales tax).
Price in long term
tends toward the average cost of the marginal curve because if prices were raised, there would be entry, if they were lowered there would be losses and exit
market power
the ability of a firm to raise the prices it charges without losing business
marginal existing firm
the firm that would first leave the market given there are some in the market. has an economic profit of 0 or close but expects negative
average cost curve
the firm total cost vs the quantity produced. normally falls than rises because fixed costs decrease as costs are spread over more units and variable costs increase as inefficiencies rise
recipe for firm in imperfect competition
the marginal cost curve intersects the marginal revenue curve at the optimal Q, use that to go to the demand curve and find the price at that many units
progressive (income) tax
the more you make the more you pay
economic profit
the total revenue aka total economic costs which accounts for the opportunity costs and is the next best use of entrepreneurs time and money
natural monopolies
a market where it is most efficient for a single company to serve all
bargaining power
a person or firms ability to negotiate a better deal depending on a party's next best alternatives
advertising
a tool for positioning with the purpose of shifting the demand curve right and steepening the demand curve faced by the firm
permanent income
average lifetime income which is a greater reflection of consumption decisions
profit margin per unit
average revenue - average cost aka price -average cost determining if a firm should enter the market
social safety net
cash assistance, goods, and services provided by the government to help people at the bottom of the income distribution
positioning products optimally
comes from existing competitors, potential entrants, and potential substitute products
merger
companies become one which could restrict competition in a market or enhance competition although maybe the merged entity is more efficient
non price competition
competing to win customers by differentiating the product
price competition
competing to win customers by offering lower prices which can drive prices down in a market with similar goods and few firms or if there's no cost advantage
5 forces framework
competition attacks on a firms profits through positioning products optimally and increasing bargaining power
anti collusion rules
competitors are not permitted to collude
effective advertising
depends on market structure and type of good
ways in which firms differentiate
features, quality, customer service, design/style, reliability, convenience, subjective factors
supply side barrier
find cost advantages because if firms have lower costs than potential ones, they won't enter (even if marginal firm has 0 profits, another one with lower costs might have positive ones)
benefit of market power
firms can make a lot of money
entry/exit
in the short run there is none, but in the long run, firms can enter and exit. how long the short run is depends on market
affect of companies leaving
increase in demand, increase in your market power, increase in profit margin
goal of a business person
increase profits which includes beating current competition and scaring away potential
relationship specific investment
investment that is more valuable if the current relationship continues, most common for firms with a few large customers
collusion
keeping prices high
intergenerational mobility
kids outcomes independent of parents
merger review
large companies need government approval to merge
how to find cost advantage
learning through experience to produce at lower costs, mass production, cheaper inputs, and making suppliers inputs more expensive
affect of new competition
left shift demand from losing customers, reduced market power due to more choices so flatter demand curve, profit margin shrinks
licensing requirements
makes it harder to open a new firm
perfect competition
many competitors, same product, flat market power curve, increase price by a penny and sell none, decrease and sell a lot
product differentiation
many small sellers but goods aren't identical, markets are characterized by monopolistic competition
safety net programs
means tested for social safety nets (ex: healthcare, subsidized rent), paid for by taxes
utility
measure if a persons well being
poverty
measured based on a number formula and if household income is below, you are considered poor, relative to your country
foregone wages
money not made by doing something else
income redistribution
mostly progressive till top 1%, taxes are a tool to make society better
positive economic profit decline
new rivals enter decreasing market share and power of existing firms decreasing quantity, price, and economic profit
monopoly market power
no competitors, unique product, market power and demand curve are the same since only seller in market
free entry
occurs until all firms have 0 economic profit aka AR=AC at one point if each firm has the same AC curve and all are earning profits
positioning tradeoff
on the demand side you want as many consumers as possible and be similar to rivals, but on the supply side you don't want to start pricey competition, so if price competition could be intense, differentiate
hold up problem
once a firm makes a relationship specific investment the other side might try to negotiate
oligopoly
only a few large sellers
economic profit
positive if average revenue is greater than average cost
patents
prevent competition for a specified amount of time
antimonopoly rules
regulating monopoly
negative economic profit increase
rivals exit increasing market share and power increasing quantity, price, and economic profit
deterrence strategies
scare away new firms from entering in ways such as a war chest of cash to fight entrants or developing a rep as a fighter
type of good
search goods vs experience goods
rational rule for marginal revenue
sell as long as MR>MC, as Q increases so does MC so eventually the firm won't want more
average revenue curve
shows the average revenue for each quantity you might sell aka firm demand curve
monopoly
single seller of good
con of market power
society is often worse of because firms try to get power to reduce competition which is bad for consumers, which the government fights by promoting competition
price takers
suppliers and demanders in perfect competition with no incentive than to buy or sell anything other than at market price, no control of the market price, and no market power
increasing bargaining power
suppliers trying to charge more and customers trying to pay less
marginal tax rate
tax on the next dollar you earn
costs of redistribution
taxes create deadweight loss and discourage work
sum of app cost of starting a business
the annual payment you need for it to be worth investing your time and money. if you accept a penny less you are worse off
utiliterianism
the belief that we should act to maximize total utility in society
marginal utility of income
the boost to well being for an extra dollar
marginal potential new firm
the firm that would first enter the market given there are some that might join. Has a 0 or close to 0 economic profit but expects positive
average cost
total cost over quantity aka the sum of the variable and fixed costs each over quantity
accounting profit
total revenue - total financial costs aka all of the money that goes in and out of a business (out of pocket costs)
average revenue
total revenue over quantity aka price
util
unit for utility, life satisfaction
entry of competitors
when existing companies have good profit it can attract new firms in the long run because it signals potential profit
peace of mind/stress
you could be working longer hours and feel stressed or could be opposite that you feel fulfilled
foregone interest
you invest money in business that could go in stocks
experience good
you need to experience to evaluate so firms might run persuasive advertisements with little information about a good
diminishing marginal utility of income
your 50000 dollar of income helps less than your 1000th
discount effet
in order to sell that next unit, the firm had to decrease price on all units losing revenue for each additional unit by 1pxQ
oligopolistic competition
Imperfect, few competitors, same or different products, same market power curve as monopolistic
how advertising is socially inefficient
a lot of it, especially persuasive, is wasteful because it serves to steal customers but society benefits when firms get surplus regardless of who
search good
easy to search info and evaluate before buying so a firm might do informational advertising providing info about the product
long run equilibrium
economic profit tends to 0 and that of the marginal firm is 0 given all have different MC curves
barriers to entry
existing firms make it harder to enter through demand side, supply side, regulatory, and deterrence
demand side barrier
existing firms try to keep customers so that they aren't affected when new ones enter through switching costs, reputation and goodwill, and network effects
consequences of hold up problem
for fear of being held up, firms might not make investments even if they're beneficial
opportunity costs of starting a business
foregone wages, foregone interest, peace of mind
regulatory strategies
getting the government to make it harder for new firms to enter through patents, new business regulations, licensing requirements, and lobbying
social insurance
government run programs that you pay in good times and help you in bad times, paid for by taxes
market power comp vs perfect comp
higher prices, lower quantity, higher profit of firm, firms with power might not be efficient because competition is not forcing them to be
new business regulations
hoops a firm has to jump through before opening
product differentiation
if a firm differentiates its product, it might appeal to some people who are willing to pay more and there is less price competition leading to more market power
who enters and exits
if a firm knows it will have economic profit, it will enter or stay. if it knows it will have 0 or negative, it will leave
output effect
if a firm sells 1 more it will get revenue from the additional unit
network effects
if a lot of people use a company's good, others might want to
market structure
if products are similar, firms will tend not to advertise because of free rider, if unique, then you can advertise the product rather than the brand, if it has imperfect substitutes, you advertise specific products aggressively to grab rival customers
switching costs
impediments that make it costly for customers to switch products
monopolistic competition
imperfect, many competitors, different products, market power curve has down slope but such that an increase in P will lose some customers but not all, steeper than demand