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34 Cards in this Set

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5 Characteristics of a Competitive Market

1) Perfectly Competitive Mkt


2) many buyers, many sellers


3) Identical (Homogeneous) Product


4) Buyers & Sellers are price takers(?)


5) Firms can freely enter/exit

Obj. Of Competitive Firm

Maximize Profits when total revenue exceeds total costs by greatest amt. Firm will weigh marginal revenue/benefits with marginal cost.

In a competitive firm, when MR>MC

Firm increase output and raise profit

Pay attention to signs and relation to output

In a competitive firm, when MR<MC

Firm decrease output and raise profit

Pay attention to signs and relation to output

In a competitive firm, when MR=MC

Firm is maximizing profit

Equal Rights does Maximum Good

Average Revenue Equation

Total Revenue / Quantity

Revenue from each unit sold

Marginal Revenue Equation

♤TR/♤Q

Revenue recieved when next unit is sold

P= (definition in regards to competitive firm and equal to...)

Market Price, which in a competitive firm equala Avg Revenue and Marginal revenue and is taken as given in the competitive firm.

Short Run Shutdown Rule

Gtfo if
P < AVC Fixed costs are sunk costs. Regardless of production, rent still needs to be paid.

Long Run Exit Rule

If P > ATC or P= ATC ; firm produces. In other words, if the Economic profit is greater or equal than zero, the firm should produce. (ATC, think of as LR unit cost)



(If price < atc, gtfo)

Profit Fn

(P-ATC)Q.

LR supply upward shift

A) ltd. raw materials


B) increase q.supplied ->increased demand for resources -> increase prices of inputs and raise codts -> firms increase price for higher production cost


C) firms have different costs


D) some firms earn profit in long run



LONG RUN ALWAYS MORE ELASTIC

Monopoly

Sole Producer of Product (no competition) and faces down slope market demand. Also has pricing power and can charge above marginal cost. makes the prices!



Monopolist Revenue

Average Revenue > Marginal Revenue



Output Effect in a Monopoly

As Q Rises, Total Revenue Increases (assuming everything stays same)`

Price Effect in a Monopoly

As P falls, Total Revenue Decreases (assuming everything stays same) NOTE: IN COMPETITIVE FIRMS: NO PRICE EFFECT AS PRICE=AVG. REV=MARG REV.



How does a monopoly sell more?

Lower Price. Whilst this reduces revenue, you still sell more.

Deadweight in the Monopoly

Set by Marginal Cost and Demand's intersection, and straightedge right of Monopoly Price



Three Barriers to Entry for Monopoly's Existence

1) Monopoly Ownership of Vital Input (eg. DeBeers Diamonds had 80% mkt share and controlled industry)

2) Gov't Created Monopolies (exclusive rights granted by Patents/Copyrights)




3) Natural Monopolies (market only can supply

1st Degree Price Discrimination

Selling different costs to different markets- where price is exactly equal to value of good. Difficult in Practice.

2nd Degree Price Discrimination

Bulk Discounts, Quantity Discounts, Cable Company Bundles



3rd Degree Price Discrimination

Movie Tickets, Restaurant Prices, Airline Tickets, Tuition

LONG RUN v. SHORT RUN

The Long Run has no fixed costs, whereas the Short Run reflects fixed and variable costs.

Imperfect Competition

In between 2 Extremes of Monopoly and Perfect Competition.

Oligopy Characteristics

Few Firms, Each produces identical/similar products (Aircraft Mftg., Tennis Balls)



Monopolistically Compettive Characteristics

Many Firms, Differentiated Product, Faces downward sloping demand representing consumers with preference for that type of product. Free Entry/Exit (movies, novels, cars)

Different strokes for different folks and easy out after your one night stand

4 Firm concentration Ratio

SALES OF 4 LARGEST FIRMS/TOTAL SALES OF MARKET

If over 60%, it is oligopistic.

Pricing and Output for the Monopolistically Comp. Firm

Produce where MR=MC and price off of given demand curve. Like a Monopoly, but differing demand curve.
IF P>ATC, other firms will freely enter, and demand left
P<ATC, free exit, demand right


No profit in long term.

MR MCDonald and PAT C

Characteristics of Long Run Equillibrium

P>MC and P=ATC on downward slope of ATC Curve. (P=ATC , so Econ Profit Zero)

Price is greater than changes but evens out!

Differences between Monopolistically Comp and Perfectly Comp

1) Perfect Comp firm is at most efficient scale of production, Mono Comp is less than optimal.

2) Price = MC for Competitive Firm, Price is above MC for monopolistically competitive firm

Excess Capacity in terms of Monopolistic Competition

It has the ability to produce at most efficient scale, but it would need to reduce it's price. Forgoes this so it can attract most customers

Markup Pricing in terms of Monopolistic Competition

Market Power is there- as good produced is differentated-scarce and can price above Marg Cost. Long run has zero profit.

Markup Pricing has the same initials, like the amount of ***** I give and is priced above *HEAVY BLUE SIGH*

Why is regulation of Monopolistically Compettive Firms difficult?

Too many firms to regulate and Long Run Econ Profit is 0

Game Theory

how do you act in strategic situations