• Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

Card Range To Study

through

image

Play button

image

Play button

image

Progress

1/68

Click to flip

Use LEFT and RIGHT arrow keys to navigate between flashcards;

Use UP and DOWN arrow keys to flip the card;

H to show hint;

A reads text to speech;

68 Cards in this Set

  • Front
  • Back
price takers
take the price determined in the market

can sell all their output at the market price, but are unable to sell any of their output at a price higher than the market
price searchers
choose the price that they will charge for their product

the quantity they are able to sell is very much related to that price
competition as a dynamic process
rivalry or competitiveness between or among parties to deliver a better deal to buyers in terms of quality, price and product info.
pure competition
"price-taker markets"

a market structure characterized by a large number of small firms producing an identical product in an industry (market area) that permits complete freedom of entry and exit
barriers to entry
obstacles that limit the freedom of potential rivals to enter and compete in an industry or market
conditions of price taker market
1. all the firms produce an identical product (ex. beef, cattle)
2. large number of firms exist in the market
3. each firm supplies only a small portion of the total amount supplied to the market
4. no barriers limit the entry or exit of firms
marginal revenue
the incremental change in total revenue derived from the sale of one additional unit of a product

MR = change in total revenue / change in output
profit maximization when the firm is a price taker
in SR, price taker will expand its output until MR (P) = MC

where P = MC
calculate total revenue vs. total cost
TR = P x q
sales price of each unit x output sold

TC = ATC x q
average total cost x output level

when revenues > costs = profit
a firm making losses will operate in the SR, if...
1. it can cover its variable costs now
2. it expects price to be high enough in the future to cover all costs
temporary shut down
will do so if cannot cover variable costs, but doesn't want to go out of business

*will still incur fixed costs, unless go out of business
MC curve = supply curve when...
short-run supply

as price increases, firms will expand output along their MC curve, therefore supply curve
long run equilibrium in price-taker market
can earn the normal rate of return and only the normal rate, because...

if profit: new firms will enter the industry to make money, and the increase in supply puts downward pressure on prices

if loss: will leave the market because the decrease in supply will put upward pressure on prices
conditions for LR equilibrium in price-taker market
1. quantity supplied must = quantity demanded in market
2. firms must earn 0 profit ("normal" rate of return)
market response to increased demand
1. demand rises from D1 to D2
2. causes the price to rise frm P1 to P2, leading to profits
3. profits lead to new entry and increase in supply in market
4. a new equilibrium is reached, at a higher output and original price

(p. 12 in Chp. 9)
market response to a fall in demand
1. demand falls from D1 to D2
2. causes the price to fall from P1 to P2, leading to economic losses
3. causes firms to reduce output or exit, decreasing the market supply until
4. equilibrium is reached at a lower output and original price
LR market supply curve
shows the minimum price at which firms will supply various market output levels, given enough time to adjust the sizes of their plants and to enter/exit the industry
3 possibilities for long run market supply
constant-cost industry
increasing-cost industry
decreasing-cost industry
constant-cost industry
an industry for which factor prices and costs of production remain constant as market output is expanded

LR market supply curve is therefore horizontal (perfectly elastic)
increasing-cost industry
an industry for which costs of production rise as output is expanded

higher market prices will be needed to induce firms to expand total output

as a result, LR market supply curve will slope upward to the right
increasing costs and LR supply
1. demand rises from D1 to D2
2. causes the price to rise temporarily to P3, leading to profits
3. causes added output from current and new producers, increasing market supply, lowering price and raising cost until
4. profits disappear for the firm and a new equilibrium results at a higher price and output
5. reflects in the new, LR market equilibrium
decreasing-cost industry
an industry for which costs of production decline as the industry expands

the market supply is therefore inversely related to price

will slope downward and to the right

not typical
time with elasticity of supply
the elasticity (more horizontal) of the market supply curve usually increases when suppliers have more time to adjust to a change in price
a profit is...
a reward that businesses will earn if they produce a good that the consumers value more (as measured by their willingness to pay) than the resources required for the good's production
competitive price-searcher market
markets that are characterized by
1. low entry barriers
2. firms that face a downward sloping demand curve
differentiated products
products distinguished from similar products by characteristics like quality, design, location and method of promotion

ex. ice cream from Haagen-Dazs isn't identical to Ben and Jerry's or Baskin-Robbins
monopolistic competition
describes markets characterized by large number of sellers that supply differentiated products to a market with low barriers to entry

aka competitive price-searcher market
price searcher with expanding output
will lower price and expand output (increasing profits) until MR = MC

the loss in price shows: what would've been sold at a higher price, therefore lower P over all

the increase in quantity shows: that because the price was lowered, more units could be sold
competitive price-searcher and LR normal profit
firms can make either profits or losses in the SR, but only normal profit (zero profit) will be possible in the LR

firms are free to enter/exit and will do so based on profits/losses

because of free entry, competition will eventually drive down prices to the level of ATC for price searchers
contestable markets
a market in which firms can enter and exit with minimal risk

efficient production and zero economic profits should prevail in contestable markets
conditions of contestable markets
1. prices above the level necessary to achieve zero economic profits
2. costs of production will be kept to a minimum
the entrepreneur in economic models
can't incorporate fully the function of the entrepreneur because their judgment is necessary when there is no decision rule that can be applied using only information that is freely available
entrepreneurs
-to be successful, must consistently offer consumers at least as much value for their dollar as they can get elsewhere
-slave to the consumers wants
-have strong incentive to manage and operate business efficiently in both price-taker and price searcher
price-taker vs. price-searcher in identical cost conditions
because searcher confronts a downward sloping demand curve for its product, the price of the product in the searcher market will be slightly higher than taker market
price discrimination
where a seller charges different consumers different prices for the same product or service

can gain more profit by:
-charging a higher price to consumers with a less elastic demand (ex. plane tickets to business men) vs. more elastic (ex. vacationers, students)
-by offering discounts to customers whose demand is more elastic


*price-searcher markets
conditions of price discrimination
1. ID and separate at lease 2 groups with differing elasticities of demand
2. prevent those who buy at the low price from reselling to the customers charged at higher prices
possible high entry barriers
1. economies of scale
2. government licensing
3. patents
4. control over an essential research
ex. high barriers--economies of scale
airline routes may be contestable, but airplane manufacturing is not, because much of the equipment used cannot be shifted to other uses

movie ticket prices for children that adults have to pay, but same price for popcorn, because easily transferred
ex. high barriers--licensing
must obtain a government license to operate a radio or TV station

*most effective method of protecting a business form potential competitors; because can be costly to obtain and make a major deterrent to the entry of potential rivals
ex. high barriers--patents
pharmaceutical companies obtain patent, and then manufacturers have to pay them

typically patents last for 20 years in the US

*the entry barrier created, generally leads to higher consumer prices for several years

*increase the potential returns to incentive activity, thus encouraging scientific research and technological improvements
ex. high barriers--control over an essential resource
Aluminum Company of America controlled the only known supply of bauxite (used to make aluminum) available to the US before WWI; however when other supplies were discovered, ACA lost its advantage
monopoly
characterized by:
1. single seller of a well-defined product for which there are no good substitutes
2. high barriers to the entry of any other firms in that particular market
monopolist will expand output until...
like a price searcher, until MR = MC
monopolist profit vs. loss on a graph
profit: if demand is above ATC

loss: if demand is below ATC
oligopoly
"few sellers"

characterized by:
1. a small number of rival firms
2. interdependence among the sellers because each is large relative to the size of the market
3. substantial economies of scale
4. high entry barriers to the market
economies of scale in oligopoly
must gain a large share of the market before it can minimize the per-unit cost

ex. automobile company must produce at lease 1 million vehicles out of the 6 million sold annually to reach the minimum, in competition with the other 5 companies
collusion
agreement among firms to avoid various competitive practices, particularly price reduction

may involve formal agreements or merely tacit recognition (harder to identify)

in the US, antitrust laws prohibit collusion and conspiracies to restrain trade
cartel
an organization of sellers designed to coordinate supply decisions so that the joint profits of the members will be maximized

will seek to create a monopoly in the market
oligopoly vs. monopoly prices
oligopoly prices are typically above per-unit cost, but below those a monopoly would charge

if collusion were perfect, then oligopoly would receive same results as monopoly

oligopolists recognize their independence and try to keep prices down, but there are obstacles
an undetected price cut will enable a firm to...
1. attract customers who normally don't buy form any firm at the higher price and more important
2. attract customers who would normally buy from the other firms
oligopolistic agreements tend to be unstable
-strong incentive to cooperate with rivals so that joint profit can be maximized
-strong incentive to cheat to expand output secretly
obstacles to collusion
1. as the number of firms in an oligopolistic market increases, the likelihood of effective collusion declines
2. when it is difficult to detect and eliminate price cuts, collusion is less attractive
3. low barriers
4. unstable demand conditions (differences of opinion, future uncertainty)
5. vigorous antitrust action
market power
the ability of a firm that is not a pure monopolist to earn persistently large profits, indicating that is has some monopoly power

because the firm has few/weak competitors, it has a degree of freedom from vigorous competition
game theory
a tool used to analyze strategic choices made by competitors in a conflict situation like the decisions made by firms in an oligopoly
economists criticisms of high entry barrier markets
1. when entry barriers are high and there are very few, if any, alternative suppliers, the discipline of market forces is weakened
2. reduced competition results in allocative inefficiency
3. government grants of monopoly power will encourage rent seeking; resources will be wasted by firms attempting to secure and maintain grants of market protection
policy alternatives when entry barriers are high
1. control the structure of the industry to ensure the presence of rival firms
2. reduce artificial barriers that limit competition
3. regulate the price and output of firms in the market
4. supply the market with goods produced by a government firm
natural monopoly
a market situation in which the average costs of production continually decline with increased output

the average costs of production will be lowest when a single, large firm produces the entire output demanded by the market place
reductions in the effectiveness of regulation
1. lack of information
2. cost shifting ("fair return" rule)
3. special interest influence
mitigation vs. adaptation
mitigation: reduce C emissions in order to keep global temperatures from rising as much as they otherwise would

adaptation: making changes when and if actual problems begin to occur
approaches to controlling pollution
1. pollution charges or taxes
2. emission standards and tradable permits "cap-and-trade")
the economic functions of the stock market
1. the stock market provides investors, including those who are not interested in participating directly in the operation of the firm, with an opportunity to own a fractional share of the firm's future profits
2. new stock issues are often an excellent way for firms to obtain funds for growth and product development
3. stock prices provide information about the quality of business decisions
primary vs. secondary market
primary: the market in which financial institutions aid in the sale of new securities

secondary: the market in which financial institutions aid in the buying and selling of existing securities
future profits depend on...
1. the expected size of future net earnings
2. when these earnings will be achieved
3. how much the investor discounts the future income
random walk theory
the theory that current stock prices already reflect all available information that is known or can be predicted about the future state of stock pricing
portfolio
all the stocks, bonds, or other securities held by an individual or corporation for investment purposes
equity mutual fund
a corporation that pools the funds of investors, including small investors, and uses them to purchase a bundle of stocks
managed equity mutual fund
where an "expert" generally supported by a research staff, tries to pick and choose the stock holdings of the fund in a manner that will maximize its rate of return
indexed equity mutual fund
equity mutual fund that holds a portfolio of stocks that matches their share in a broad stock market index

ex. S&P 500, Dow Jones