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135 Cards in this Set
- Front
- Back
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Pure Monopoly
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An industry in which there is only one supplier of a product for which there are no close substitutes and in which it is very difficult or impossible for another firm to coexist.
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4 Characteristics of perfect competition
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1. Many small firms
2. Homogeneous products 3. No impediment to entry 4. Perfect information |
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Price Taker
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A firm that has no choice but to accept the price determined by the market
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Variable Cost
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a cost that changes with quantity supplied
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Barriers to Entry
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Attributes of a market that make it difficult or expensive for a new firm to enter the market.
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Patents
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A legal device that protects an invention from being produced by anyone else for a limited period of time
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Economic Profit
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Total profit minus opportunity cost
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Pure Competition
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A market structure that has all of the features of perfect competition except perfect information
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Natural Monopoly
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An industry in which advangates of scale allow a single firm to supply the market at a lower cost than multiple firms
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Monopoly Profits
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Excess profits persistently earned by a monopoly firm over and above what would be earned under perfect competition
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Cartel
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A group of sellers who have joined together to control the production, sale, and price of a product.
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Price discrimination
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The sale of a given product at different prices to different consumers when there are no differences in the costs of supplying the customers. Additionally, it occurs when the same price is charged but the cost of supply is different.
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Monopolistic Competition
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A market in which products are heterogeneous but is otherwise perfectly competitive
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Oligopoly
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A market dominated by a few sellers, at least several of which are large enough to influence market price
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Price Leadership
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One firm sets the prices for the industry and others follow
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Price War
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Competing firms sell at increasingly and irrationally low prices to eliminate the other or gain market advantage
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Sales Maximization
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Occurs when a firm prices to maximize sales vice profit
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Markup Pricing
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The unit cost is based on the average variable cost plus a % markup
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Cost-Plus Pricing
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Firms set prices by adding an arbitriary costing margin to some measure of unit to allow for profit.
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Average Cost Pricing
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A normal average cost (which includes fixed cost) is calculated based on normal output and a margin is added
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Sticky Prices
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A price is sticky if it does not often change.
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Kinked demand curve
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A demand curve that changes slope abruptly at some level of output
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Economies of Scale
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Savings obtained through increased production. Requires variable costs to decrease with production.
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Monopoly power
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The ability of a firm to earn high profits by raising prices above competitive levels
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Regulation
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Legal controls or restrictions on a firm's activity designed to protect the public from monoply power and other forms of exploitation
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Economies of scope
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Savings obtained to simultaneous production of different products the production of which is complimentary (cable + internet)
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Cross subsidization
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When a firm's losses on one product are covered by profits on another
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Price Cap
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A ceiling above which regulators do not permit prices to rise.
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Anti combines policy
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Programs and laws that preclude the creation of monopoly and prevent powerful firms from engaging in anti-competitive practices
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Concentration
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An indicator that measures teh share of total sales or assets of the industry in the hands of the largest firms
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Concentration Ratio
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the percentage of an industry's output producted by the four larges firms
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Herfindahl Index
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A measure of concentration in which a firm's market share percentage is squared
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Predatory Pricing
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Selling at low prices designed to eliminate the competition
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Bundling
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Occurs when a supplier offers discounts when multiple products are purchased.
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Laissez Faire
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Minimal government interference with the workings of the market system
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Input-Output analysis
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A mathematical process that accounts for industrial interdependence
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Consumer's Surplus
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The difference between the maximum amount a consumer is willing to pay and what he pays.
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Producer's Surplus
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The difference between the minimum amount a seller is willing to accept and what he accepts
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Deadweight Loss
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The loss in economic surplus (consumer and producer) that arises from a departure from perfect competition
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When are resoures considered to be misallocated?
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when there is a possible alternative use that would make consumers better off
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Beneficial externality
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occurs when an activity produces incidental benefits to those not involved in the activity
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Detrimental Externality
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Occurs when an activity causes incidental damages to others not involved in the activity
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Marginal social cost
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the sum of an activity's marginal private cost plus its incidental costs (detrimental or beneficial)
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Marginal private cost
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the share of an activity's marginal cost that is paid for by the firm conducting the activity
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Marginal social benefit
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the sum of its marginal private benefit plus its incidental benefit (positive or negative)
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Margina private benefit
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the share of an activity's marginal benefit that is received by the firm who carries out the activity
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Public Good
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A good whose benefits are not depleted by additional users and whose use is impossible to deny
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Private Good
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A commodity characterized by depletability and excludability
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Depletable
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A commodity is depletable if it is finite and can be used up
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Excludable
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A commodity is excludable if someone who does not pay for it can be denied access to it
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Transaction Cost
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The costs of obtaining necessary information, bargaining costs, implementation costs etc related to decision making
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Rent seeking behavior
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Unproductive activity in the pursuit of economic profit - profit in excess of competitive earnings.
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Moral hazard
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The tendency of insurance to discourage policy holders from protecting themselves from risk
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Agent
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Individuals hired to run complex organizations on behalf of the owerns (principals)
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Principal
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The owners of a firm
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Stock Option
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A contract that permits its owner to buy a specified quantity of stocks of a corporation at a future date, but at the price specified in the contract rather than the stocks' market price
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Cost disease of personal services
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The tendency of the costs and prices of these services to rise persistently faster than those of the average output in the economy
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Per capita income
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The average income of all people in an economy
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Productivity
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The value of all goods and services produced there, divided by the total labour time devoted to the economy's productive activities
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Industrial Revolution
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The stream of new technology and the resulting growth of output that began in England toward the end of the 18th century
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Capitalism
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An economic system in which most of the porduction process is controlled by private firms operating in markets
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Invention
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The creation of new products or processes or ideas that underlie them
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Innovation
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The process that begins with invention and includes improvement to prepare the invention for practical use and marketing of the invention or its products
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Entrepreneur
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An individual who organizes a new business firm, particularly a firm that offers new products or new productive technology
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Research and Developmen
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the activity of firms, universities, and government agencies that seeks to invent new products and provesses and to improve those inventions so that they are ready for the market of other users
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High Technology
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Highly advanced and rapidly developing areas of tech - aerospace, computers, communications, pharmaceuticals etc.
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Cross licensing
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One firm allows another to use its patents in exchange for money, other patents etc..
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Ratchet
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An arrangement that permits some economic variable such as investment or advertising to increase but prevents the variable from subsequently decreasing
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Product innovation
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The introduction of a good or service that is entirely new or involves major modification of earlier products
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Process innovation
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An innovation that changes the way a product is produced
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Basic Research
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Research that seeks to provide scientific knowledge and general principles
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Applied Research
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Research whose goal is to invent or improve particular products or processes, often for profit
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Technolgy Trading
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An arrangement in which a firm voluntarily makes its privately owned technology available to other firms either in exchange for access to the technology of the second company or for an agreed upon fee
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Direct Controls
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Government rules that tell orgs or individuals what processes or raw materials they may use or what products they are permitted to supply or purchase
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Pollution Charges
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Taxes that polluters are required to pay. The amount paid depends on what they emit and in what quantities
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Emissions permits
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licenses issued by the government specifying the maximum amound the licence holder is allowed to emit. Often traded in markets.
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Progressive tax
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A tax in which the average rate paide rises with income
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Proportional tax
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One in whic the average tax rate is the same at all income levels
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Regressive tax
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A tax in which the average tax rate falls as income rises
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Averate tax rate
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The ratio of taxes to income
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Margina tax rate
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The fraction of each additional dollar that is paid in taxes
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Direct taxes
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Taxes imposed in the individual who is meant to bear the burden of the tax
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Indirect taxes
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Taxes levied on specific economic activities
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Tax Shelter
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A special provision of the Income Tax Act that reduces or defers taxation if certain conditions are met
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Capital Gain
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The profit made from the sale of an asset at a higher price than was paide for it
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Tax deduction
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a sum of money that may be subtracted before the taxpayer computes his or her taxable income
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Tax credit
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a sum of money that may be subracted from the amount of tax owed by the taxpayer
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Fiscal federalism
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the system of grants from one level of government to the next
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Horizontal Equity
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The notion that equally situated individuals should be taxed equally
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Vertical Equity
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The notion that differently situated individuals should be taxed differently in a way that society deems to be fair
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Ability to pay principle
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The idea that people with greater ability to pay taxes should pay higher taxes
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Benefits principle of taxation
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holds that people who derive benefits from a service should pay the taxes that finance it
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Burden of a tax
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the amount one would have to be given to be just as well off without it
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Excess burden of a tax
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the amount of a tax to an individual by which the burden exceeds the tax paid
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Incidence of tax
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an allocation of the burden of the tax to specific individuals or groups
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Tax Shifting
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Occurs when the economic reactions to a tax cause prices and outputs in the economy to change, thereby shifting part of the tax onto others
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Direct Tax
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taxes imposed on the individual who is meant to bear the burden of the tax
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Indirect Tax
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taxes levied on specific economic activities
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What are some common sources of monopoly?
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1. Legal Restrictions
2. Patents 3. Control of a scarce resouce 4. Deliberate barriers to entry 5. Large sunk costs 6. Technical superiority 7. Economies of scale |
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At what output level does the monopolist maximize profit?
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MR = P
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What are some characteristics of monopolistic behavior?
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1. A monopolist's profit persists
2. A monopolist restricts output to raise short run price 3. A monopolist rescricts output to raise long run price 4. Monopoly leads to inefficient allocation of resources (lower production at a higher price than P.C.) |
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How does a monopolist earn positive economic profits?
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Through barriers to entry
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How can a monopoly shift demant curves?
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Advertising (like Kodak in the 80s) can increase demand for the product but prices will likely follow
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How can a monopoly help society?
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1. Innovation (arguable)
2. Economy of scale |
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In discriminatory pricing, how does one decide what prices to charge?
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The marginal revenue from both groups must be equal to generate optimal profits
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What are two criteria for the existence of a monopoly?
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1. Barriers to Entry
2. Cost advantages to single firm operation |
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4 Characteristics of monopolistic competition
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1. Numerous participants
2. Freedom of entry and exit 3. Perfect information 4. Heterogeneous products |
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What are the long run profits in monopolistic competition?
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Zero - The AC curve is tangent to the demand curve
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How does the monoplistic competitor maximize profits?
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MR = MC
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Why is the demand curve tangent to the AC curve in monopolistic competition?
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If demand curve is above AC curve, firms will enter the market and push demand down. The converse is also true.
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What is a disadvantage to society of monopolistic competition. What is an advantage?
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Because the downward sloping demand curve is tangent to the AC curve, AC is never minimized and consumers pay more than they would under Perfect Competition. However, they get more choice.
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What is an important characteristic of oligopolistic decision making?
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It is interdependent - one ologopolist's actions will affect the actions of others
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What are the four major behavioral models for oligopolistic behavior?
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1. Ignoring interdependence
2. Strategic Interaction 3. Cartels 4. Price Leadership & Tacit Collusion |
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What are some alternate models of oligopolistic behavior?`
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1. Sales maximization - allows a firm to gain market share
2. Constant marginal costs - allows a firm to be responsive to demand changes or deter entry to newcomers |
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How do some firms have constant marginal costs?
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Their plant is designed for a given output. Only above that output do marginal costs rise sharply.
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What are reasons for sticky prices?
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1. Cost based pricing
2. Customer relations 3. Non-price competition 4. Coordination failure 5. Factor Stability 6. Explicit Contracts 7. Low inflation 8. Menu costs 9. Sticky information |
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What are reasons for changing prices?
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1. Price changes by competitors
2. Changes in domestic input costs 3. Changes in demand for products or services 4. Changes in wage costs |
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Perfectly contestable market
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Entry and exit is free
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How does a perfectly contestable market affect economic profits
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It ensures there will be no excess economic profit
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Reasons why the government tries to discourage monopoly power.
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1. High prices reduce the wealth of customers
2. High prices lead to resource misallocation 3. Monopoly power creates an obstacle to efficiency and innovation |
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When would the government permit a monopoly?
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When it is demonstrably able to provide economies of scale and scope
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What are two challenges faced by regulators
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1. Setting prices in the public interest that don't cause financial hardship for the firm
2. Preventing firms with monopoly power from earning excessive profits without eliminating incentives for efficiency and innovation |
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What are some advantages of "bigness"
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1. Economies of scale
2. Required scale for innovation |
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What are some effects of deregulation?
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1. Effects on prices
2. Effects on local services 3. Effects on entry 4. Effects on unions 5. Effects on product quality 6. Effects on safety 7. Effects on profits and wages |
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What are some causes of market failure?
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1. Imperfect information
2. Transaction costs 3. Rent seeking behavior 4. Moral hazard 5. Principal/agent scandals |
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What are some desirable practices wrt stock options?
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1. Options are unexercisable for a fixed period of time
2. Granting of options is performance based 3. Granting options is subject to shareholder votes 4. Exercising of options be made public ASAP |
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What is one of the problems with the debate between free markets and regulation?
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Proponents of either side are too often polarized.
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What is the main cause of the cost disease of personal services?
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Productivity gains in manufacturing outpace productivity gains in the services
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Where do the majority of innovations come from - even today?
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Individuals and small firms. Large firms tend to be risk averse.
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What characterizes innovations from large company's R&D cells
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They tend to be incremental improvements and narrowly focused
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What is are the reasons for the market system's unprecedented success?
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1. Efficiency
2. Innovation |
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What are 3 approaches to environmental policy
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1. Volunteerism
2. Direct Controls 3. Taxes on pollution |
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What are advantages of taxing pollution?
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1. Enforcement issues - taxes are automatic
2. Incentivize pollution reduction |
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When would direct controls on pollutino be more appropriate than taxes?
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1. When an emission is so dangerous that it must be prohibited
2. A sudden change in circumstances calls for immediate change 3. Where effective pollution metering technology is non existent. |
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How is an emission permit different from a tax?
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A permit assignes a right to pollute a certain amount. A tax merely charges per unit pollution. The former caps pollution.
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