Microeconomics Final (CH. 9, 10, 19)

What are the two types of monopolies based on the types of barriers to entry they exploit?

(1) Natural Monopoly (2) Legal Monopoly

Marginal Profit

MR - MC profit of one more unit of output

Deregulation

the removal of some government controls over a market

Legal Monopoly

where laws prohibit (or severely limit) competition most legal monopolies are utilities that are socially beneficial

What are the 5 barriers to entry focused on in Chapter 9?

(1) Natural Monopoly (2) Control of a physical source (3) Legal Monopoly (4) Patent, Trademark, and Copyright (5) Intimidating potential competitors

What are the 3 steps to decide a price in a profit-maximizing monopoly?

(1) The Monopolist Determines Its Profit-Maximizing Level of Output - find where MR = MC (2) The Monopolist Decides What Price To Charge - draw a straight line up from Q1 to point R on its perceived demand curve (3) Calculate Total Revenue, Total Cost, and Profit - total revenue will be Q1 multiplied by P1, total cost will be Q1 multiplied by the average cost of producing Q1, profits will be TR - TC

Analyze this graph

(point A): Saudi Arabia can produce 100 barrels of oil at maximum and zero corn (point B): Can produce 25 bushels of corn and zero oil (point C): Combination

Now, analyze this graph

(point A): US can produce 50 barrels of oil at maximum and zero corn (point B): Can produce 100 bushels of corn and zero oil (point C): Combination

Oligopoly

A market structure in which a few large firms dominate a market

What would occur if the US exported 20 bushels of corn to Saudi Arabia in exchange for 20 barrels of oil?

At point C (Saudi oil production of 60), reduce Saudi oil domestic oil consumption by 20 (bc of the trade). Saudi then reaches point D (oil consumption is now 40 barrels and corn consumption has increased to 30) Because point D is beyond the PPF, Saudia Arabia will gain from the trade

Why do many argue that monopolies are inefficient?

Because in the case of monopoly, price is ALWAYS greater than marginal cost at the profit-maximizing level of output. This means that consumers suffer from monopolies because they will sell a lower quantity in the market, at a higher price, than would have been the case in a perfectly competitive market

Explain the concept of mutual beneficial trade

Even when one country has an absolute advantage in all goods and another country has an absolute disadvantage in all goods, both countries can still benefit from trade. Trade allows each country to take advantage of lower opportunity costs in the other country. Gains from international trade, on both sides, result from pursuing comparative advantage and producing at a lower opportunity cost.

What happens when a monopolist increases sales by one unit?

Every other unit must now be sold at a lower price

What is the long-term result of entry and exit in monopolistic competition?

Firms end up with a price that lies on the down-ward sloping portion of the AC curve, not at the very bottom of the AC curve thus, monopolistic competition will NOT be productively efficient

What is the long-term result of entry and exit in a perfectly competitive market?

Firms sell at the price level determined by the lowest point on the AC curve Displays productive efficiency: goods are produced at the lowest possible average cost

Intellectual Property (IP)

Ownership of innovation by an individual or business enterprise; includes patented, trademarked, or copyrighted property. (also includes trade secret law)

Patent vs. Trademark vs. Copyright

Patent: gives an inventor the exclusive right to make, use, or sell an invention for 20 years Trademark: an identifying symbol or name for a particular good; firms can renew a trademark repeatedly as long as it remains in active use Copyright a form of protection provided by the US for original works; no one can reproduce, display or perform a copyrighted work without author's permission

Profit maximizing point in a perfectly competitive firm vs. a monopoly

Perfectly Competitive Market: MR = P as well as MC Monopoly: MR = MC

Differentiated Products

Products distinguished from similar products by characteristics like quality, design, location, and method of promotion.

What are the opportunity costs of producing one unit of oil for Saudia Arabia? US?

Saudia Arabia - 1/4 US - 2

What are the opportunity costs of producing one unit of corn for Saudia Arabia? US?

Saudia Arabia - 4 US - 1/2

What role can advertising play with respect to differentiated products?

Shapes consumers' intangible preferences

Who has comparative advantage of corn? oil?

The US has a comparative advantage in corn because they give up the least to produce a bushel of corn Saudia Arabia has comparative advantage in oil production because they give up the least to produce a barrel of oil

Can one country have an absolute advantage in everything?

This is typical for high-income countries that often have well-educated workers, technologically advanced equipment, and the most up-to-date production processes. These high-income countries can produce all products with fewer resources than a low-income country.

Game Theory

a branch of mathematics that economists use to analyze the strategic behavior of decision-makers

What characteristics create an Oligopoly setting?

a combination of barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition

Gain From Trade

a country that can consume more than it can produce as a result of specialization and trade

Cartel

a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price

Monopoly

a market in which one firm produces all of the output; faces no significant competition and can charge any price it wishes

Monopolistic Competition

a market structure in which many firms sell products that are similar but not identical

What is the relationship between the monopolist and price?

a monopolist can charge any price for its products, but the demand for the firm's product constrains the price

If oligopolists collude with each other, they act as __________ and __________

a monopoly; succeed in pushing up prices and earning consistently high levels of profit

Kinked Demand Curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

Perfectly competitive firms are price takers; a firm that holds a monopoly position in the market place is _________

a price maker

Prisoner's Dilemma

a scenario in which the gains from cooperation are larger than the rewards from pursuing self interest

Duopoly

a two-firm oligopoly

What is the difference between perceived demand and market demand?

as perceived by a perfectly competitive firm, the demand curve is not the overall market demand curve for that product as perceived by a monopoly, the demand curve is the same as the market demand curve the reason for the difference is the number of firms in the market

In a monopoly, where will profits will be highest?

at the quantity of output where total revenue is most above total cost

The market revenue curve for a monopolist lies _________ the demand curve

beneath

Allocative Efficiency

economic concept regarding efficiency at the social or societal level

Profits induce firms to __________, which causes a shift to ___________ profit

enter, zero

Losing money induce firms to __________, which causes a shift to ___________ profit

exit, zero

The demand curve for a monopolistic competitive firm.....

falls in between the perfectly competitive demand curve and the monopoly demand curve (market demand curve)

Imperfectly Competitive

firms and organizations that fall between the extremes of monopoly and perfect competition

Where does a natural monopoly occur on a market graph?

occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve

If oligopolists compete hard with each other, they act as __________ and __________

perfect competitors; drive down costs and lead to zero profits for all

The demand curve for a perfectly competitive firm is....

perfectly elastic

While profits take costs into account, _____________ do not

revenues

Natural Monopoly

the barriers to entry are something other than legal prohibition (1) often occurs if the marginal cost of adding an additional customer is very low (2) can arise in smaller markets for products that are difficult to transport (3) also occurs when a company has control of a scarce physical resource

Barriers to entry

the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market; barriers may block entry even if the firm or firms currently in the market are earning profits

The demand curve for a monopoly is....

the market demand curve

What does the slope on the production possibility frontier illustrate?

the opportunity cost

Where is the profit maximizing choice for monopolists?

the point where MR = MC

Predatory Pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market

How does a monopolistic competitor determine how much to produce?

the same way as a monopolist: from the point at which marginal revenue is EQUAL to marginal cost

If MC > MR

they are producing at a quantity higher than the profit maximizing quantity the monopolist gains profit by decreasing output

If MR > MC

they are producing at a quantity lower than the profit maximizing quantity the monopolist gains profit by increasing output

Collusion

when firms act together to reduce output and keep prices high They do this by: (1) holding down industry output (2) charging a higher price (3) dividing up the profit among themselves

Comparative Advantage

when one country can produce a good at a lower cost in terms of other goods

Absolute Advantage

when one country can use fewer resources to produce a good compared to another country

Marginal Cost

∆ TC / ∆ Q the cost of producing one more unit of a good

Marginal Revenue

∆ TR / ∆ Q the change in total revenue from an additional unit sold

Trade Secrets

methods of production kept secret by the producing firm a company who does not have a patent on an invention are allowed to keep their products secret; competing firms are not allowed to steal their secrets