Economics Unit 3

Cartel agreement

an agreement that specifies that they will act in a coordinated way to reduce the competition among them and hopefully raise their profits

labor union

an organized association of workers, often in a trade or profession, formed to protect and further their rights and interests; want to raise wage and improve working conditions

What are the legal barriers to monopolies?

Public franchises, patents, and copyrights make entry into a monopolistic market more difficult

Franchise

-A contract in which a firm (usually a corporation) lets a person or group use its name and sell its goods and services -In return, the group or person (franchisee) must meet certain requirements and payments

Benefits of limited partnerships

-A limited partner will only be liable for the amount of capital they contributed to the business -Attracts investors due to the less liability on the firm -Limited partners share in the profits and losses without having to manage the business itself

Monopolistic competitors go about trying to become monopolists by...

-Advertising -Celebrity endorsements

Board of directors

-An important decision making body in corporation→ decides corporate policies and goals, among other things -Decides what products the corporation will produce and sell -Chooses the corporation's top officers

Oligopolistic markets examples

-Automotive big 3: GM, Chrysler, Ford -Toilet paper -Pencils

Sellers in a perfectly competitive market are price takers

-Because there are many buyers and sellers, each buyer or seller is a price taker, so all sellers supply the same identical product. This is the model of supply and demand. -If a seller could influence the price, it would not be acting according to a supply curve. In the long run, we also require that firms can freely enter or exit the market.

General partnership

-Broadest form of partnerships -Responsible for the management of the firm -They have unlimited liability -If one of the partners makes purchases that puts the firm in debt, both partners are liable for the profits and losses of the firm ex ) google

Monopolists are price searchers

-Can sell their products at a variety of prices -Tries to find best price that makes the most profit -A trial and error process: How much do we produce? How much do we charge? -NOT a price taker

A corporation is a legal entity that can...

-Conduct businesses in its own name the same way business do -Owned by its stockholders -Share of stock gives purchaser a share of the ownership of the corporation

Disadvantages of a franchise

-Contract -Failure to provide financial and training support (franchiser) -Failure to provide the quality of service (franchisee) -Not much room for creativity -One franchisee can affect another franchisee's reputation

Sole proprietorships are taxed only once

-Different US taxes include sales tax, property taxes, corporate income taxes, and personal income taxes -The profit you earn is counted as your income and only personal income taxes apply -You do not have to pay corporate income taxes

According to our text and the new way of thinking, what are the two major economic systems?

1)free enterprise 2)socialism

What are the flaws with the characteristics of a perfectly competitive market?

-Due to their tiny market share, all buyers and sellers are price takers, therefore they cannot change price -All goods are identical and they're selling the same thing, so there's a lot of competition -There are no barriers to entry or exit, therefore anyone could join the market -Consumers have perfect information-they know everything about the product -All firms have equal access to resources and technology-all of them can easily advance

Identifying oligopolistic markets

-Economists look at the sales from the top 4 sellers in the industry -Will be a necessity, popular

Unions' Effects on Union and Nonunion Wages

-From 1920-1979, labor unions made an average of 10-15% higher wages than nonunion laborers -An economics study in 2004 showed union workers making 27% higher wages

Why is it hard for sole proprietorships to raise funds?

-Harder to find and borrow funds because lenders are not eager to lend funds to business firms whose success depends on one person -Sources of money are often limited to personal funds and the funds of close friends and family members

Factors influence your productivity

-Innate inability -Effort put into developing skills -Quality and length of education More education = more income

Advantages of Monopolies

-Low per-unit cost -Reduce waste from creating the same product -Can invest in new technology -The lack of competition allows their prices to be lower, passing the benefits into the consumer

What are the characteristics of oligopolies?

-Nearly identical products -Difficult to enter the market -Few sellers

What is a monopoly?

-One seller -No product substitutes -High barriers to entry

How much competition does an oligopoly face?

-Products in an oligopoly are not unique -It is difficult to enter the market sellers are shielded from new seller -Competition is so stiff people don't want to enter the market

Disadvantages of Monopolies

-Profit is not guaranteed -Legal barriers

Benefits of a franchise

-Provides skilled workers and training -National advertising -Less risk: Failure rate is 12 times higher for independent business than franchise -Cost less

Why is profit not guaranteed for monopolies?

-Sellers will only earn profit if the price if above the total cost -There also has to be a demand for a monopoly seller to make profit

What are the two ways to raise money for corporations?

-Selling bonds / "issuing debt" -Issue, or sell, additional shares of stock: A claim on the assets of the corporation that gives the buyer a share in ownership of corporation

3 essential elements of general partnerships

-Sharing profits and losses -A joint ownership of the business -An equal right in the management

Low per-unit cost

-Some firms have such a low average cost that they can lower their price and still earn profits -When the price of their product is so low, other firms cannot compete -This creates a natural monopoly

Benefits of partnerships

-Specialization: two people with different skill sets can work to their strengths to better the firm -Only personal income taxes paid

How much competition a seller faces depends on

1)how close to unique a seller's product is 2)how easy it is for new sellers to enter the market

Corporate structure

-Stockholders are the most important people in corporation. They are its owners and they elect member of the board of directors -Board of directors→ an important decision making body in corporation→ decides corporate policies and goals, among other things

When we say that a product is slightly different (in a monopolistic competitive market) from another product, what do we mean?

-Taste and appearance -Location -How it is packaged -Where it is from -From whom is it from -Whether it is delivered may all make a difference to a consumer

What factors make demand for your labor services high?

-The demand for the good you produce -Your productivity

Costs of limited partnerships

-The general partner who manages the business firm has unlimited liability -Limited partnerships must file a certificate of limited partnership before the business is formed, and state filing fees come with this action

Eventual limits to monopolies?

-The sky is NOT the limit for monopolies -Demand still comes into play -The height of the demand curve is the limit -Searching for the right price to get the highest amount of profits and to sell their entire output

What are the characteristics of a perfectly competitive market?

-There are a large number of buyers and sellers in the industry, and all have such a small market share that they cannot influence the market. Every firm and consumer is a price takers. -All goods are identical (homogenous). -There are no barriers to enter or exit the market. -Consumers have perfect information and know everything about the product. -All firms have equal access to resources and technology and there is a constant or decreasing returns to scale. -Perfect mobility of the factors of production and goods -Absence of price control

How are sole proprietorships easy to form and dissolve?

-There are few government regulations regarding the formation of businesses, such as for a restaurant it must be clean and abide by certain zoning restrictions -To dissolve a business, you just stop doing business

What do monopolistic competitive firms do?

-They produce the quantity of output at which marginal revenue equals marginal cost -They figure out what price they charge by searching for the highest price per unit at which they can sell their entire output

Cartels

-Unique to oligopolies -The few major leaders to come together to discuss trade -When they meet - known as collusion

Costs of partnerships

-Unlimited liability: "the state in which general partners are held responsible for all business debts if the business firm cannot pay its liabilities" -Members of partnerships often have different ideas on how to run the firm, and partners sometimes "back-stab" each other

Why do some people earn more than others?

-Wage rates can differ because the supply for labor for different types of job is not the same -Wage rates can also differ due to the demand for different types of labor is not the same

two views of labor unions

-With a labor union in place, a company loses its competitive edge -Labor union will create "job exciting," which is the creation of a happier and more productive work environment

How does decision making power reside in the sole proprietor?

-You alone get to make all the business decisions → you are the boss -No stockholders or partners to tell you that you cannot expand -Decisions can be made quickly and easily

Determinants of Supply

1. Costs (price or resources, weather, availability of resources) 2. Number of Sellers 3. Technology 4. Government Action: Taxes, Subsidies, and Quotas 5. Future price

What are the three main types of partnerships?

1) General partnerships 2) Limited partnerships 3) Limited liability partnerships

Disadvantages of sole proprietorships

1) Liability 2) Limited ability to raise funds for a business expansion

What are the two types of wages?

1) Money 2) Real

3 advantages of corporations

1) Owners of corporation (stockholders) have limited liability: Not liable for company debts 2) Corporations existence DOES NOT depend on the existence of its owners, rather the corporation itself is a legal entity: They continue to exist even if one or more of the owners sells their shares 3) Corporations are able to raise large sums of money by selling stock: People are more willing to invest in a corporation than in other businesses forms due to limited liability

What's are the three types of business firms?

1) Sole proprietorships 2) Partnerships 3) Corporations

3 elements of a franchise

1) The franchisee pays an initial fee 2) The franchisee gives parts of its profits to the franchiser for a certain amount of time 3) Franchisee meets quality requirements or standards

Advantages of sole proprietorships

1) They are easily formed and dissolved 2) Decision making power resides in the sole proprietor 3) Profit of the firm is only taxed once

2 disadvantages of corporations

1) Vulnerable to double taxation: Subject to both corporate and personal income tax 2) Complicated to set up: A number of documents have to be prepared and filing fees must be paid to its state's secretary of state office

What is an oligopolistic market?

1)Has few sellers 2)Firms produce and sell either identical or slightly differentiated products 3)Barriers to entry are significant

What are the 3 laws that influence law of demand?

1)Substitution effect 2)Income effect 3)Law of diminishing marginal utility

From the old way of thinking, what are the four economic systems?

1)Traditional 2)Command 3)Free Market 4)Mixed

Determinants of Demand

1. Tastes and preferences 2. Number of consumers (population) 3. Prices of related goods (substitutes and complements) 4. Income (normal/inferior/neutral goods) 5. Future expectations

How many corporations are in the United States?

5.1 mil. Corporations in the US ex) apple, berkshire hathaway

Sole proprietorship

A business that is owned by one individual that makes all the business decisions, receives all the products or takes all the losses of the firm and is legally responsible for all the debts of a firm

Law of diminishing marginal returns

A law that states that if additional units of one resources are added to another resource in a fixed supply, eventually the additional output will decrease.

What do the determinants of demand and/or supply cause?

A left or right shift of demand or supply

How much competition does a perfectly competitive market face?

A lot -Sellers produce identical products -In a competitive position -If a seller raises their prices slightly, the consumer can easily buy somewhere else

What is a perfectly competitive market?

A market structure characterized by 1)many buyers and sellers 2)all firms selling identical goods 3)all relevant information about buying and selling activities available to buyers and sellers 4)easy entry into and exit out of the market

Price Taker

A seller can sell all its output at the equilibrium price but can sell none of its output at any other price

Partnerships

A type of business owned by two or more co-owners

Corporate charter

A written document filed with US state by the founders of a corporation describing the major components of a company -Signals birth of a new company -Once filed and approved, corporation becomes legitimate and legal -Can take up to 7 years to be approved

What is marginal cost?

Additional cost of producing an additional unit of a good→ refers to the change in total cost that results from producing an additional unit of output

Assets

Anything of value that the firm has a legal claim over

Oligopolistic markets occur...

Anytime 2-5 companies control 60% or more of the market

Law of Supply

As price increases, the quantity producers make increases. As price decreases, quantity producers make goes down.

What is the law of supply?

As price increases, the quantity producers make increases. As price decreases, quantity producers make goes down.

How much competition does a monopoly seller face?

Basically none -Less than either a perfect competitor or a monopolistic competitor -Sells products that have no close substitutes -It's not easy to walk away from a monopoly when it raises its prices because no sellers sell a close substitute for that product

How do you determine income distribution?

By using decile ratios

Which economic model best illustrates the interactions of production in a free enterprise?

Circular flow diagram

CPI

Consumer Price Index Average price of goods

Fixed cost

Costs, or expenses that are the same no matter how many units of a good are produced ex) rent, insurance

Variable costs

Costs, or expenses, that vary or change with the number of units of a good produced

What are economic side effects known as?

Externality, unintended effect

Robinson-Patman Act

Protects small businesses from the competition of large and growing chain stores

Based on the law of demand, a demand curve will slope in which direction? Why?

Downward from left to right because price and quantity demanded have an inverse relationship

Wheeler-Lea Act

Empowered the Federal Trade Commission (FTC) to deal with false and deceptive acts or practices by businesses

What is an example of a perfectly competitive market?

Farmers Each farmer has very little say over what price they can charge for their harvest because there is a market price they have to meet, and if they don't, no one will buy their product.

Franchiser

Head of the franchise

When there is a surplus in the market, where is the price located in relationship to equilibrium price?

Higher than the equilibrium price- need to decrease

Limited liability partnership (LLP)

Hybrid between a large partnerships and a group of sole proprietors -A group of specialists work under the same company or firm name but work independently from the other partners -Liability is limited to the amount invested ex) doctors office→ in a doctors office, multiple doctors work under the same office name but if one gets busted for malpractice, only that single doctor is in trouble

Law of Demand

If price increases, then quantity demanded decreases. If price decreases, then quantity demanded increases.

Wages also depend on supply

If the demand is high for you, but so is the supply, you will likely not earn a high wage

What is the substitution effect?

If the price goes up for a product, consumers will buy less of that product and more of another substitute product (and vice versa)

What would happen if the demand and the supply shifted simultaneously?

Indeterminant

Federal Trade Commission Act

It declared illegal "unfair methods of competition in commerce." In particular, it was designed to prohibit aggressive price-cutting acts.

What is a monopolistic competitive market?

It is a hybrid between a perfectly competitive market and a monopoly. 1)many buyers and many sellers 2)the production and sale of slightly differentiated products 3)easy entry into and easy exit from the market

Disadvantage of Limited liability partnerships

It is very complex to form and is listed as a partnerships, sole proprietorship, or corporation for tax purposes

Clayton Act

It made certain business practices illegal when their effects "may be to substantially lessen competition or tend to create a monopoly." This act prohibited price discrimination and tying contracts.

Sherman Antitrust Act

It states that attempting to become a monopolist or trying to restrain trade is illegal

A product such as hamburgers has elastic demand. How will a small increase in price affect demand?

It will greatly influence quantity demanded. If the price increases, the demand will greatly decrease.

How a society answers the three economic questions will define what?

Its economic system

What are the factors of production?

Land, labor, capital, entrepreneurship

When there is a shortage in the market, where is the price located in relationship to equilibrium price?

Lower than the equilibrium price- need to increase

Profit Maximization

MR=MC

Clayton Act

Made price discrimination and tying contracts illegal

What is marginal analysis?

Marginal analysis is figuring out marginal revenue and marginal cost. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits.

There are two types of benefits in a job...

Money benefits- income Non-money benefits- perks

Monopoly Sellers vs Competitive Seller

Monopolists are price searchers: -Sometimes this can be more difficult -Setting a price that consumers will be willing to pay without a point of reference can be difficult -Monopoly sellers control the market, but they still have to appeal to the consumer Competitive sellers are price takers: -They must base their prices around the prices of the competition -Although it is easier to determine prices, price takers have little to no control of the market and have lower profits

Monopolistic competitors vs monopolies

Monopoly: 1)market consists of one seller; 2)the single seller sells a product that has no close substitutes; 3)the barriers to entry are high, entry into the market is difficult Monopolistic competitors: 1)many buyers and many sellers; 2)the production and sale of slightly differentiated product; 3)easy entry into and easy exit from the market

Why would monopolistic competitors want to become monopolists?

Most monopolistic competitors would rather be monopolists because it would be easier to make a profit if you were the only seller of a product. There would be less competition.

Do partnerships always only have two people involved?

No, there can be numerous partners who have ownership in firm

What is a monopoly?

One seller No product substitutes High barrier to entry

Business firm

Organizations that use resources to produce goods and services that are sold to consumers, other businesses, or the government

Stockholder

People who buy shares of a stock in a corporation

The situation prevailing in market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers

Perfectly competitive market

Franchisee

Person who buys part of the franchise

Robinson-Patman Act

Prohibited sellers from offering discounts to bigger companies unless they also offered them to small businesses

Federal Trade Commission Act

Prohibits unfair methods of competition, specifically cutthroat pricing

When there is a shortage of labor, meaning the quantity of supplied labor is less than the quantity of demanded labor, the wage rate rises

Qs labor < Qd labor = shortage of labor = wage rate rises

When there is a surplus of labor, meaning the quantity of supplied labor is greater than the quantity of demanded labor, the wage rate falls

Qs labor > Qd labor = surplus of labor = wage rate falls

Liability for sole proprietorships

Sole proprietorship involves UNLIMITED LIABILITY This means that a person's personal assets- house, car, etc. - can be used to pay off business debt

How much competition does a monopolistic competitive seller face?

Some -Does not face as much competition from current sellers because it produces products that are slightly different from that of other sellers -If a seller raises their prices slightly, all of their consumers will not leave them -Easy entry- new sellers can quickly join the market and add more competition

What is a bond?

Statement of debt issued by a corporation, or in other words an IOU, piece of paper on which is written a promise of pay

What are the differences between stockholders and bondholders?

The corporation has no legal obligation to pay stockholders -Bond purchases must be repaid -Stockholders do not lend funds, they buy a part of it

What is the substitution effect connected to according to the law of demand?

The income effect You would only use the substitution effect if the price is too high- from income effect

Wage rate

The price of labor

What is a popular model used to illustrate the concept of opportunity?

The production possibilities frontier

Market structure

The setting in which a seller finds itself. Market structures are defined by their characteristics, such as the number of sellers in the market, the product that sellers produce and sell, and how easy or difficult it is for new firms to enter the market

What do antitrusts help to do?

They help retain lower prices and higher quality with more choices

Sherman Antitrust Act

This act declared that anyone trying to create a monopoly or restrain trade is illegal

How many stages are in the Law of Diminishing Returns?

Three: increasing marginal returns, decreasing marginal returns, negative returns

Why would we use ceteris paribus?

To draw a correct demand or supply curve-want to keep out determinants

Average total cost equation

Total cost divided by the quantity of output

Total cost equation

Total costs= fixed costs + variable costs

How can a business determine if they are making a profit or taking a loss?

Total revenue - total cost = If it is positive- profit If it is negative- loss If it is 0- Break Even Point

Based on the law of supply, a supply curve will slope in which direction? Why?

Upward from left to right because price and quantity demanded have direct relationship

What is the economic term for the amount of satisfaction a consumer receives from consuming a product?

Utility

Limited partnership

When one owner has unlimited liability and manages the business, while the other owners are "silent partners" and are basically investors in the company ex) shark tank investors

Ceteris paribus

When reading a demand curve, assume all outside factors, such as income, are held constant

Equilibrium wage rate

When the number people employers are willing and able to hire equals the number of people willing and able to be employed

Why do those in labor unions make more money than those not in labor unions?

When union workers bargain for higher wages, the company can no longer support a full staff because the union workers now cost more to keep employed As a result, the company will fire a few union workers because of the cost and lower the wages or amount of nonunion workers in order to support a full staff again

Profit is a signal in a perfectly competitive market

Will never make a big profit because once others see you making profit, they will sell the same product

Can price takers sell for less than the equilibrium price?

Yes, but why would they? -Yes, there could be the possibility of more buyers, but more buyers for a product with a decreased price can lead to a shortage. -This would also cause the market to temporarily be out of equilibrium

Derived demand

a demand that is the result of some other demand

Elastic

a price change has a significant impact on the quantity demanded; greater than 1

Public franchise

a right granted to a firm by government that permits the firm to provide a particular good or service but excludes others from doing so

Wage floor

a set value that wages cannot fall below

Marginal cost equation

change in total cost /change in quantity

Marginal revenue equation

change in total revenue / change in quantity

Demand for labor is known as...

derived demand

The demand for labor on a graph has a

downward slope, which means that as wage rates fall, companies can hire more employees

What do antitrust laws protect consumers from?

exploitation by monopolies and ensure that competition exists

Minimum wage law

federal law that sets the lowest hourly wage rate that can be paid to workers

Antitrust law

government action to prevent the monopoly's complete control over prices

Higher demand for you =

higher wage rate

In the early 1900s...

injunctions were used to prevent strikes

National Labor Relations Board (NLRB)

investigated labor practices

Taft-Hartley Act

made it impossible for labor workers to require employers to make labor union employment a requirement

Money wage

measuring a person's wage in terms of money (sometimes called "normal wage")

Real wage

measuring wage in terms of what it buys

Real wage equation

money wage/cpi

closed shop

organization that hires only union workers

union shop

organization that required people to join a union after a certain time period after getting hired

Monopolistic competitor's products can be different in any way that is

perceived as different by the consumers

Just as we can use supply and demand to determine the price of goods, we can also use it to determine the

price of labor

Total revenue equation

price x quantity demanded

Total revenue

refers to the total receipts from sales of a given quantity of goods or services

Wagner Act

required employers to bargain with employees and made it illegal for employers to interfere with their employees' rights to form a union; formed NLRB

Wage rate =

salary/hours

Oligopolies are price...

searchers -They have some control over the price they charge -They can raise the price of their good and still sell some of the goods they produce

Monopolistic competitive firms are price...

searchers -We call firms in a monopolistic competitive market price searchers, because the products that they sell are slightly different from any other product in the market -Therefore if they raise their prices, they will still sell some of its product because the consumers cannot find an identical product in the market

A perfectly competitive market is a price...

taker

In a perfectly competitive market, profit may be...

taxed away

Demand for labor is dependent on

the demand for the good or service that labor produces

Knights of Labor

the first labor union, an organization to pursue better benefits for skilled workers

Unit-elastic

the impact of a price change is neutral-that is, neither major nor minor; equal to 1

Income distribution

the way all the income earned in a country is divided among different groups of income earners

Inelastic

there is a minor change in quantity demanded when the price changes; less than 1

in 1842, courts decided that

unions were not illegal, but some union practices were

The supply for labor on a graph is

upward sloping, which means that as wage rates increase, the supply of employees willing and able to work increases