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68 Cards in this Set
- Front
- Back
price takers
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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 |
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price searchers
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choose the price that they will charge for their product
the quantity they are able to sell is very much related to that price |
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competition as a dynamic process
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rivalry or competitiveness between or among parties to deliver a better deal to buyers in terms of quality, price and product info.
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pure competition
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"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 |
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barriers to entry
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obstacles that limit the freedom of potential rivals to enter and compete in an industry or market
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conditions of price taker market
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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 |
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marginal revenue
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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 |
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profit maximization when the firm is a price taker
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in SR, price taker will expand its output until MR (P) = MC
where P = MC |
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calculate total revenue vs. total cost
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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 |
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a firm making losses will operate in the SR, if...
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1. it can cover its variable costs now
2. it expects price to be high enough in the future to cover all costs |
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temporary shut down
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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 |
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MC curve = supply curve when...
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short-run supply
as price increases, firms will expand output along their MC curve, therefore supply curve |
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long run equilibrium in price-taker market
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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 |
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conditions for LR equilibrium in price-taker market
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1. quantity supplied must = quantity demanded in market
2. firms must earn 0 profit ("normal" rate of return) |
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market response to increased demand
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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) |
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market response to a fall in demand
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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 |
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LR market supply curve
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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
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3 possibilities for long run market supply
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constant-cost industry
increasing-cost industry decreasing-cost industry |
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constant-cost industry
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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) |
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increasing-cost industry
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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 |
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increasing costs and LR supply
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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 |
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decreasing-cost industry
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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 |
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time with elasticity of supply
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the elasticity (more horizontal) of the market supply curve usually increases when suppliers have more time to adjust to a change in price
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a profit is...
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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
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competitive price-searcher market
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markets that are characterized by
1. low entry barriers 2. firms that face a downward sloping demand curve |
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differentiated products
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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 |
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monopolistic competition
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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 |
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price searcher with expanding output
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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 |
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competitive price-searcher and LR normal profit
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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 |
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contestable markets
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a market in which firms can enter and exit with minimal risk
efficient production and zero economic profits should prevail in contestable markets |
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conditions of contestable markets
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1. prices above the level necessary to achieve zero economic profits
2. costs of production will be kept to a minimum |
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the entrepreneur in economic models
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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
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entrepreneurs
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-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 |
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price-taker vs. price-searcher in identical cost conditions
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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
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price discrimination
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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 |
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conditions of price discrimination
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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 |
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possible high entry barriers
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1. economies of scale
2. government licensing 3. patents 4. control over an essential research |
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ex. high barriers--economies of scale
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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 |
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ex. high barriers--licensing
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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 |
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ex. high barriers--patents
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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 |
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ex. high barriers--control over an essential resource
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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
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monopoly
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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 |
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monopolist will expand output until...
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like a price searcher, until MR = MC
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monopolist profit vs. loss on a graph
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profit: if demand is above ATC
loss: if demand is below ATC |
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oligopoly
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"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 |
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economies of scale in oligopoly
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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 |
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collusion
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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 |
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cartel
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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 |
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oligopoly vs. monopoly prices
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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 |
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an undetected price cut will enable a firm to...
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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 |
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oligopolistic agreements tend to be unstable
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-strong incentive to cooperate with rivals so that joint profit can be maximized
-strong incentive to cheat to expand output secretly |
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obstacles to collusion
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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 |
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market power
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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 |
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game theory
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a tool used to analyze strategic choices made by competitors in a conflict situation like the decisions made by firms in an oligopoly
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economists criticisms of high entry barrier markets
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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 |
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policy alternatives when entry barriers are high
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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 |
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natural monopoly
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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 |
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reductions in the effectiveness of regulation
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1. lack of information
2. cost shifting ("fair return" rule) 3. special interest influence |
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mitigation vs. adaptation
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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 |
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approaches to controlling pollution
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1. pollution charges or taxes
2. emission standards and tradable permits "cap-and-trade") |
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the economic functions of the stock market
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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 |
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primary vs. secondary market
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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 |
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future profits depend on...
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1. the expected size of future net earnings
2. when these earnings will be achieved 3. how much the investor discounts the future income |
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random walk theory
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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
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portfolio
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all the stocks, bonds, or other securities held by an individual or corporation for investment purposes
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equity mutual fund
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a corporation that pools the funds of investors, including small investors, and uses them to purchase a bundle of stocks
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managed equity mutual fund
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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
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indexed equity mutual fund
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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 |