Micro Final
For Perfect or Pure Competition, the Optimal Output Quantity is found where:
MR=MC or P=MC
By observing a few industry characteristics, economists can use this information to predict pricing & output behavior within the industry.
Market structure analysis
Consumer surplus is the difference between the
Maximum price the buyer is willing to pay and the market price
A 1-firm industry with unique products and blocked/insuperable barriers to entry.
Monopoly
MR < P for which market structure?
Monopoly
What market structure doesn't act efficiently?
Monopoly
Can imperfect market structures achieve allocative efficiency?
NO
Can imperfect market structures achieve productive efficiencies?
NO
An industry exhibiting large "economies of scale" such that the minimum efficient scale is roughly equal to the market demand curve (Example of this industry would be utility companies which are regulated by the government
Natural Monopoly
How many firms in a Monopolistic Competition market structure?
301 firms to millions
Designed to maintain competition and prevent monopolies from developing.
Anti-Trust Laws
Requires a regulated monopolist (natural monopoly) to produce and sell output where the P=ATC (This permits the regulated monopolist to earn a NORMAL PROFIT ONLY!)
Average cost pricing rule
An obstacle (i.e. prohibitive fixed costs, government regulation, etc.) that makes it more difficult for a firm to enter the industry.
Barrier to entry
an agreement between firms in an oligopolistic industry where the firms collectively agree to a certain amount of output to impact prices (i.e. OPEC-Oil Producing Export Countries agree to determine the collective output levels to affect prices!)
Cartel
2nd Degree price discrimination type:
Charging different customers different prices based upon the quantities that they buy
3rd Degree price discrimination type:
Charging different groups of people different prices based on varying "elasticities of demand"
1st Degree price discrimination type:
Charging each customer the maximum price each is "willing to pay"
This classical economist was a strong advocate of the concept of "free trade."
David Ricardo
Is there a supply curve for imperfect market structures?
NO
A _____________ has Mutual-interdependence which leads to price wars within the structure.
Oligopoly
A market with a few firms dominating the industry (2 firms to 300 firms); there are significant barriers to entry in this market structure; the firms must consider its competitors decisions
Oligopoly
One firm's product is distinguished from another firm through advertising, innovation, location, etc..
Product Differentiation
X-inefficiently
Protected from competitive pressures
An increase in "quantity supplied" is caused by:
an increase in price
Before a house is sold, the buyer usually inspects the property for problems. This reduces which cause of market failure?
asymmetric information
Laissez-faire is a _______ term that means _________.
French, "let it be"
Marginal Revenue equation:
MR=MC
Regulators would prefer to have natural monopolies charge prices where "P=MC", but this would result in economic losses because the ATC> P
Marginal Cost Pricing Rule
How many firms in a Perfect or Pure Competition market structure?
Millions and billions and trillions
A market structure with a large number of firms (301 firms to millions) producing differentiated products. (i.e. retail trade firms)
Monopolistic Competition
If the price of a complementary good increases, the demand for other goods will ________________.
decrease
The "right side" of the Average Total Cost (ATC) curve represents _________ .
diseconomies of scale
All imperfect market structures have a ________________ sloping Marginal Revenue and Demand Curves.
downward
When demand for a product falls, ceteris paribus, what happens to to equilibrium price and consumer surplus at that price?
equilibrium price falls and consumer surplus falls
A demand curve that is perfectly inelastic:
has an elasticity value of 0
MR < P for all _____________ model structures.
imperfect
This resource represents the mental and physical talents of individuals who produce products and services.
labor
The basic law that was illustrated by the Production Possibilities Curve or Production Possibilities Frontier was the:
law of increasing costs
If demand is unit elastic, a decrease in price:
leaves total revenue unaffected
What portion of the demand curve is the Ed coefficient inelastic?
lower-right
Another name for variable costs are __________ costs.
marginal
The US today is classified as a _____________ economy.
mixed
Which market structure does not guarantee economic profits?
monopoly
The greater amount of time available, the:
more elastic is demand
The "steeper" the demand curve, the ________ is the "price elasticity of demand" coefficient.
more inelastic
The "law of demand"indicate that there is a(n) ______________ relationship between price and quantity demanded.
negative and inverse
What does "price-taker" mean?
no control over price
If ones income decreases decreases and they purchase less of this product, the product is specifically called a(n):
normal or superior good
The income paid to an entrepreneur is specifically called ____________.
normal profit
IF ASP (average selling price) is greater than AVC (average variable cost) then:
open the business and proceed to step 2
Marginal revenue and demand curves are:
perfectly elastic
A horizontal supply curve represents supply that is ________ and its Es coefficient equals ________.
perfectly elastic, + infinity
Price elasticity of supply is always:
positive because of the law of supply
What does "price-maker" mean?
considerable control over price by increasing or decreasing supply
Many economists argue that sale taxes are a _________ tax.
regressive
Implementing a price floor can cause a
surplus
The income statement method may only be used on:
tables
The marginal method may only be used on:
tables and graphs
The total consumer surplus plus the producer surplus is maximized at
the market price equilibrium
Allocative Efficiency
the price equals MC
However, if one firm lowers its price, other firms will lower their prices (resulting in a "kink"in the Demand & Marginal Revenue curves) so they will not lose market share true or false?
true
If a product's price rises 10% and its quantity demanded falls by 10%, then we can say that the demand for this product is:
unitary elastic
Which would be an effective advertising strategy used to increase total revenues from the sale of higher-priced related goods?
using "loss leader" goods and services
the "HI" POINTS for PERFECT or PURE Competition EQUAL
zero points
Price Discrimination Types:
1st Degree 2nd Degree 3rd Degree
How many firms in a Oligopoly market structure?
2-300 firms
Susan purchased a new printer for $150 although she was willing to pay $175. The minimum price acceptable to the seller, Jasmine, was $145. The results of this transaction are a consumer surplus of:
$25 and producer surplus of $5
What is the market structure analysis?
-# of firms -nature of industry's product -barriers to entity -extent that firms can control the price
Which elasticity coefficient would be least responsive to change in price? -2.0 -5.0 +4.0 -12.0
-2.0
If a retail store lowers its prices by 20%, and their demand increases by 80%, their "price elasticity of demand" coefficient (ed) would be equal to:
-4.00
Two methods used in the optimal output quantity and price:
-Income Statement -Marginal Revenue
What are the imperfect structures?
-Monopoly -Oligopoly -Monopolistic Competition
How many firms in a monopoly market structure?
1 firm
The "HI" POINTS for a MONOPOLY EQUAL
10,000 points
Characteristics of Perfect or Pure Competition:
-extremely large number of sellers -"price taker" (no control over the price) -standardized product -no barriers in entry/exit -no long-run economic profit (earn only normal profit/ expected profit in long-run)
Characteristics of an Oligopoly:
-few firms in industry -shared market power & considerable control over price -"Mutually-Interdependent Decisions" (lead to Price Wars) -Barriers to Entry are Substantial -Potential for Long-Run Economic Profit Only
Characteristics of Monopolistic Competition:
-many sellers -come control over price -differentiated products -little to no barriers to entry/exit -no long-run economic profit (earn only normal profit/ expected profit in long-run)
Characteristics of a Monopoly:
-only one seller -"price-maker" (considerable control over price by increasing/decreasing supply) -unique product (no close substitutes) -Barriers to Entry are BLOCKED/INSUPERABLE! -Potential for "Short-Run" & "Long-Run" Economic Profit! (NO COMPETITION!).
Two steps are utilized in determining the perfect competition:
1) Compare average selling price (on demand curve) to the average variable cost 2)Average Selling Price - Average Total Cost x Optimal Output Quantity = TOTAL ECONOMIC PROFIT $ (or TOTAL ECONOMIC LOSS $).
3 Types of Long-Run Industry Supply Curves:
1) Increasing Cost Industry 2) Decreasing Cost Industry 3) Constant Cost Industry
Four (4) Primary Market Structures:
1) Perfect or Pure Competition 2) Monopolistic Competition (real life version of perfect or pure competition) 3)Monopoly 4) Oligopoly (Real life version of monopoly)
It is the sum of the market shares for the "Top Firms" in the industry (i.e. "Top 3", "Top 4", "Top 5" Firms in an industry)
Concentration Ratio
As the firm expands, Average Total Cost (ATC) decreases
Economies of scale/ Economies of Size
it is calculated by "SQUARING" the individual firm market share percentages" for all firms that comprise that industry, AND SUMMING their TOTAL " HI" POINTS!
Herfindahl Hirschman Index (HI)
Supply Curve for Perfect or Pure Competition Model is the portion of the:
MC curve which lies above the minimum point on the average variable cost (AVC) curve
An oligopoly model that assumes that if a firm raises its price, competitors will not raise their prices
Kinked Demand Curve Model
Only which market structure achieves allocative efficiency?
Perfect or Pure Competition
The maximum price at which a regulated firm can sell its product.
Price Cap
Charging different consumer groups different prices for the same good or service (i.e. examples would be "matinee" vs. "evening" movies, "business" vs. "red-eye" air travel)
Price Discrimination
Success Rate of Cartels or Oligopolies
Success rate is LOW because firms in cartels or oligopolies "cheat" by "lowering their prices" due to stealing profitability from other firms in the oligopoly
Income Statement equation:
Total revenue minus total costs
A _____________ structure does not have the incentive to produce at the LOWEST POINT on the Average Total Cost (ATC) Curve
monopoly
The supply curve for the long run is:
more elastic
Public goods are difficult to provide in the private market because they have characteristics of:
non-rivalry and non-exclusivity
Only Perfect or Pure Competition achieves __________ in the long-run.
productive efficiency
the optimal output quantity is the LOWEST POINT on the Average Total Cost (ATC) Curve!
productive efficiency
Income taxes in the US are considered a ________ tax.
progressive tax.
Monopoly produces ____________ output quantities and charges higher prices as compared with perfect or pure competition market structures!
smaller
When price elasticity of demand is elastic, and price elasticity of supply is inelastic, consumers bear a __________ burden of taxes and sellers bear a _________ burden of taxes.
smaller, larger
