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32 Cards in this Set
- Front
- Back
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what are the characteristics of a monopoly?
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one firm
high barriers to entry |
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The demand curve monopolies face is ________ sloping, which means if they want to sell more they must _______ prices.
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Downward sloping because they have market power, meaning they have price making power, therefore they can reduce the price they charge and sell more units.
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At what quantity and price do monopolies choose to produce and why?
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They choose to produce where MR=MC because that is the point where they maximize profits. Given their price making power, they use the WTP (Demand curve) to determine p* for the quantity chosen.
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What are the efficiency and equity implications of monopolies?
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Decreased total surplus
No incentive to reduce costs High prices for consumers High profits for producers |
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What is a natural monopoly
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: an industry in which one firm can achieve economics of scale over the entire range of market supply
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What is the efficiency/equity trade off in the case of natural monopolies?
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Natural Monopolies increase total surplus (compared to perfect competition), but there are still problems with equity as firms are able to charge prices that exceed their costs, thus making large profits.
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Explain two types of price controls and their outcomes ( look in notes for more)
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Price efficiency: p=mc, solves profit>0 problem, but now firms make negative profits and require a subsidy.
Production efficiency: p=minATC, solves profit>0 problem, but the price set exceeds consumers willingness to pay, so again we have negative profits. |
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Explain 2 possible non-price regulations that can be used to regulate natural monopolies and their outcomes.
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Profit regulation: set P=ATC, solves profits problem, but decreases incentives to cut costs, and requires knowledge of the firms ATC.
Quantity Regulation: set a minimum quantity, improves p>MC problem, increases incentives to innovate, but creates incentives to decrease quality. |
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What are the characteristics of an oligopoly
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A few firms control most of the market share
Significant barriers to entry Market power Similar or different products |
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How is the concentration ratio calculated and what does it imply for firms within a market?
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The proportion of total industry output produced by the largest firms
q1+q2+q3+q4/Qmarket The concentration ratio in oligopoly markets is >60%, the higher the concentration ratio, the more market power a firm has. |
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What strategies do oligopolies use to increase sales, and what are the implications of these strategies?
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Lowering prices: other firm may retaliate lowering the price farther
Take sales from other firms without lowering price through advertising, product differentiation, etc., which are all costly to firms. |
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Draw an oligopoly’s demand curve and explain why it looks the way it does and what that means for firms in the market
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Firms face a kinked demand curve if rivals mach price reductions but nor price increases.
Demand curve is more inelastic if other firm matches price changes. |
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What are the characteristics of monopolistically competitive markets?
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Low entry barriers
Many firms Similar but slightly different products Firms maintain some price control |
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What happens to a firms demand curve as more firms enter the market?
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Firms demand curve shifts in
Firms demand curve gets more elastic |
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What strategies do these firms use to maintain (some) market power?
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Product differentiation
brand image/loyalty Advertising/perceived differences |
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What efficiency implications arise from the long run outcome of monopolistically competitive firms?
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firms receive zero profits in the long run, but:
Not at min ATC, so not as efficient as perfectly competitive firms. |
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What is abatement and how do we find the optimal level of abatement?
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Abatement is cleaning the air, or reducing pollution
Optimal abatement is where MB=MC |
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What are some abatement costs and benefits and how do they change (marginally) as we increase the amount of abatement?
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Costs include the price of abetment technology, using cleaner production inputs, etc.
Benefits include better health and environment, more polar bears, etc. MC rise as more pollution is abated MB decrease as more pollution is abated |
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Explain the 2 policies generally used to solve environmental issues and why
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Market Based:
Change firms a tax for polluting Cap and Trade: provides market incentives to decrease pollution. Proves financial incentives for firms to make their own abatement decisions. Command and Control Quotas, imposing technology restrictions |
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What are the problems with implementing policies to “solve” environmental problems
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Hard to value environmental amenities
Uncertainty in valuation and benefits Future versus current benefits, who should pay? |
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What is economies of scale?
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reductions in minimum average costs that come about though increases in the size of plant and equipment.
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Explain 3 sources of Market Power
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Barriers to entry: patents, economies of scale, acquisition, control of key inputs
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What are the costs of regulating natural monopolies?
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Enforcement/monitoring costs
Efficiency costs: by altering the mix of output can affect growth Administrative costs: need to pay researchers to understand policies/design them Compliance costs: firms have to deal with new regulations |
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Would we have more luck convincing Obama to save the polar bears if we had a high or low discount rate?
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Low
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oligopoly
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if rivals DO match price increase= INelastic
if we lower our price and the other firms follow and also lower price= INelastic If rivals DONT match price increase= lose a lot of money and Elastic (they can go find it somewhere else) if firms DONT match price decrease= lose money and elastic again! |
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with perfectly competitive market and monopoly agents maximized:
now with Nash/game theory: |
their own problems and didn't care how it affected outside people
and individuals pursued self-interest agents acting in a strategic setting. combining self and out group |
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since collision is illegal what are other ways of price fixing
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1. price leadership: firms signal each other on price-strategies if others cooperate. ex: all airlines would cooperate and charge high price= got caught)
2. profit maintenance via market share: splitting up regions or taking turns (ex: GE and westing house would rotate high prices based on the moon cycles) 3. non-price competition: - technology; maintain barriers to entry (control distribution channels. or access to retailers) - brand loyalty: product differenciation |
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how to measure environmental amenities:
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-surveys
-contingent valuation (experiments) -travel cost methods (gas, parking, camp site fees) -hedonic pricing models: estimate value of amenities relative to price of real estate |
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pros of a monopoly
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they can do research and development
positive economic profits economies of scale= cheaper for one firm to produce more than for multiple small firms |
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barriers to entry for a monopoly
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-patents
-control over key components -lawsuits -aquistions -economies of scale -monopoly franchises |
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price competition
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firms try to under cut each other
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discount equation
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PV=FVe^-rt
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