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43 Cards in this Set

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  • Back
Perfectly Competitive
straight demand curve for the firm, dictated by where supply and demand for market cross
-firm can raise profits by increasing production
firm with U-shaped MC curve
Straight MR or demand line crosses u shape twice, so a firm produces where it is upward sloping
MC crosses AVC and AC
In short term, there is no entry or, a firm whose MC crosses the AVC makes negative profits, but continues to produce. MC = AVC is the shutdown point. When MC crosses the AC, positive profits are gained. SO....MC=AC is the break even point
Long Term Break even (competitive firm)
% change in Quantity/% Change in Price
Competitive industry
All firms are competive and any firm can enter and exit.
Competitive Supply Curve (industry)
equal to sum of all firms supply curve
Why? Because of entry. More firms enter as industry selling price becomes higher
Factor-Price Effect
As more and more firms enter a market, the price of a primary input will also rise if that imput is primarily consumed by the industry in question. This causes the actual industry's supply curve to be more elastic then the simple sum of the firm's curves
Accounting Profit vs. Economic Profit
Accounting profit is revenue minus cost, however economic profit also subtracts opportunity costs.
constant cost industry
1. Each firm has the same cost curve
2. That cost curve is unaffected by expansion or contraction
---Flower seller example....little skill, and the addition of more will hardly cause total land available to increase in cost.
---Long run supply is flat
increasing-cost industry
an industry whose break even price increases with additional entrants. -Could happen because of factor-price effect or because the new firms are inefficient
decreasing cost industry
a firm whose break even decreases with new entrants.
- printer and ink maker example.
Tipping the bus boy
Good in long run for tipper, because the average cost of the meal goes down either the entire cost of the tip in a constant cost industry, or a portion of the tip in an increasing cost industry.
The maximum amount a consumer is willing to pay for an item
Consumer Surplus
The area under the demand or Marginal value curve and above the price.
Producers surplus
The producer's gain from trade, the ammount by which his revenue exceeds his production costs.
Efficiency Critereon
a normative critereon according to which your votes are weighted according to your willingness to pay for your prefered outcome.
Why sales tax is bad
A sales tax is bad because it creates a dead weight loss to society. The Robin Hood example is unanimously prefered over the sales tax, because it creates no dead weight loss.
Pareto Critereon
A normative critereon in which one outcome is chosen over another when it is unanimously prefered.
Robbery is socially inefficient, because the time the robber spends getting the loot could be spent building something new. Theoretically, the robber's surplus is the top part, the social loss is the bottom, and the loss to the individual is both. The individual will also theoretically spend up to both to protect his stuff.
Is price based on Total or Marginal Value
MARGINAL!!!!!! Diamond/Water Paradox. Diamonds are much more expensive then water, because the additional cost of a cup of water is so small and the additional cost of a diamond is so large. Despite this, the total value of all the water is much larger, and the demand for it is much more inelastic.
Produces at a quantity where Marginal Cost meets Marginal demand, but at a price where that quantity meets the demand curve. This is socially inefficient, because it could still produce more units at a higher price than they would cost. However, the monopolist would then have to lower the prices of its other goods.
Subsidized monopoly
Lower Marginal Cost through taxpayer expense so that it produces where a competitive firm would produce. This is the best answer socially, but is hard to calculate. Most instead are regulated to a normal rate of return. This is also inefficient though, because it is the efficiency, and not the profits that is the problem to society.
Price Discrimination
CHarging different prices for identical items
1st degree discrimination
Charging each person the most that they would pay for an item
--this and perfect competition are socially efficient
-Steel Seller example
2nd Degree Discrimination
Charging the same individual different prices for the same item
-Buy two, get one half off
2nd Degree Discrimination
Charging the same individual different prices for the same item
-Buy two, get one half off
3rd degree price discrimination
Charging different prices to different markets.
-The market with the greatest elasticity will get the lowest price.
-When this is done, it is done so that the MR from each of the markets is equal. If it wasn't, greater profits could be given by producing for one market and not the other.
Horizontal Integration
a merger among sellers in the same market
-Can be benificial if the merger decreases the cost so much that the price is lowered, however harmful if it doesn't.
-Creates Monopolistic Power for newly merged firm
Vertical Integration
When a firm and a firm with which it supplies imputs merge
-If both were monopolies before, this is socially beneficial because the new firm is no longer forced to pay the monopolistic price for its imputs.
Predatory Pricing
When a firm prices below marginal cost in an attempt to drive its competitors out of business.
-Inefficient, because the other firms can simply start up again when it raises prices. These firms can also get help from outside sources if they are socially viable, and also can choose to produce few products so that it harms the actual company doing it more then them .
An agreement regarding price and output among sellers. A cartel is the group of individuals involved in the collusion
Prisoner's Dillema
A collusion requires cooperation for it to be successful, however there is most often cheating which lowers the benefit to the cartel. To truly be succesful, a collusion requires regulation.
An industry in which the individual firms can affect market conditions
COntestable Market
A market in which firms can enter and leave costlessly.
Production point for a firm in a contestable market?
Where MC meets AC...or, at zero profit. Why? Because if they produced at a higher price, firms could easily enter and drive the price down.
Cournot Model
A model in which the output of a competitor is assumed, and in which the firm then assumes a monopoly on the other demanders. Thus, the production is actually less than it would be in a competitive market.
Bertrand Model
A model in which the price at which a competitor produces is assumed. This is inefficient, however, because when the producer then sets its prices a tiny bit lower and collects the profits, the competitor responds similarily. Eventually, the price is driven down to the Marginal Cost.
Product Differentiation
The production of a product that is unique, but has many close substitutes .
Monopolistic COmpetition
Two Characteristics:
1. Promotion (to emphasize differentiation)
2. Entry
Marginal Revenue Product
The additional revenue gained by the production of one more unit.
--Equal to Marginal Product times price
---Employ Labor up to the point where Marginal Revenue Product crosses Marginal Cost (Wage rate)
Why has wage rate increased, but working week decreased from 1890 to 1990?
Because non-labor income (401K, investment, etc...) has increased at an incredible ammount.
Agricultures Supply curve
Inelastic...because there is a constant ammount of vegetables/fruits/grains being produced. Thus, when that ammount is decreased by a blight...the revenue of farmers is actually increased due to the elasticity.