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55 Cards in this Set
- Front
- Back
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What causes Market Entry?
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A profit drives people into the market
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How does Market entry affect prices and quantities?
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Increases the price because of a higher number of producers
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How does market entry affect total profits?
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Make a profit because P >ATC
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What causes market exit?
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A loss drives people out of the market
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How does market exit affect market prices and quantities?
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Decreases the price because of higher number of suppliers
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How does market exit affect total pofits?
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Causes a loss because P <ATC
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Explain the long- run pricing decision under perfect competition.
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1. Improve products
2. Reduce costs of production 3. Update technology |
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What are the benefits of competition to society?
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1. Markets work best under comp
2.Lowers prices to minimum ATC 3.Improves quality 4.Resource Efficient 5.Expands markets 6.Determines the mix of output |
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Define Monopoly.
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1 Single Firm
No Competition Most market power Barriers to entry are high Exclusive product |
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What is market power?
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Price Setters
If P increases then QD decreases If P decreases then QD increases |
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What is the degree of that market power under a monopoly?
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High market power
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What is the degree of competition under a monopoly?
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Low competition
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Why is there not distinction between market demand and the firms demand under a monopoly?
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No distinction because there is only one firm.
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How do monopolies gain market power?
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They become price- setters.
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How does a monopoly determine a level of output?
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They produce a level of output that maximizes total profits.
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Explain why price does not equal marginal revenue under a monopoly.
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They have the ability to vary price and MR.
If P increases QD decreases vice versa This fluctuates revenues and marginal revenue. |
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Exaplin profit maximization for a monopoly.
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Produce where MR=MC
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What is price discrimination?
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The sale of a good/service at different prices to different consumers.
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Define Oligopoly.
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A few firms are producing all or most of the market supply.
Between 2-10 |
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What are the monopolistc aspects of an oligopoly?
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High (shared) barries to entry
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What are the competitive aspects of an oligopoly?
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Standardized product
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Explain the role of strategic interdependence under an oligopoly.
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Decision-making based upon the reactions from rivals.
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Define the concentration ratio.
Whats the typical ratio? |
Percent of industry output produced by the four largest firms.
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How does an oligopolist increase sales without changing prices? How does it affect market shares of rivals?
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Increase sales at current market price by advertising and marketing. Increases sales at expense of the rivals.
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What is a pure oligopoly?
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Standardized product (identical)
Decrease Price will Increase Market share at expense of rivals. |
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How does an oligopolist increase sales by changing prices? How does it affect market shares of rivals?
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Increase sales by lowering market price. No meanger change in market share.
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What is a differentiated oligopoly?
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Differentiated Product. Decrease in price leands to no or meager change in market share.
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How do oligopolists retaliate against each other?
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1. marketing and advertising or product differentation (used more often)
2.Price war (risky b/c dont know when will end) |
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Explain the kinked demand curve under an oligopoly
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Incorporates responses of competitiors to price changes.
Competitiors match price reductions but not price increases. |
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Demand curve if rivals dont match (oligopoly)
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Small decrease price leads to large Increase QD Vice versa
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Demand curve if rivals do match (oligopoly)
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Decrease in price leads to small increase QD vice versa
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Define monopolistic competition.
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Impercent competition
many firms producing similar products, but each firm maintains some control over price. Many firms Low barriers to entry Differentiated product |
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Explain the importance of product differentiation and brand loyalty under monopolistic competition.
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Gives you the ability to distinguish your output from rivals.
Gives market power |
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What are the monopolistic aspects of monopolistic competition?
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Monopoly on brand image
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What are the competitive aspects of monopolistic competition?
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Firms must compete with close substitutes.
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How does a firm under monopolistic competition determine a level of output?
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Produce at a level of output that maximizes total profit
Produce where MR=MC |
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Explain the competitive process under monopolistic competition.
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If P > ATC = profit
Increase Producers, Increase Supply decrease Price but Decrease in QD due to Increase in Product Variet If P<ATC= Loss Decrease in producers, decrease supply, increase in price, but Increase QD due to decrease in product variety. |
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Low Concentration Ratio (MC)
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20-40 percent
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Independent production decisions (MC)
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Decisions by one firm wont affect the market shares of others
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5 characaterstic of monopolistic competition
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1. Low concentration ratio
2.Independent production decisions 3. Low barriers to entry 4.Market power 5. Differentiated products |
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Low Barriers to Entry (MC)
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Profits lead to new producers leading to profit squeeze
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Market Power (MC)
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Ability to alter price
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Differentiated Products (MC)
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Ability to distinguish your output from rivals.
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Define an optimal mix of output
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Sociall desireable mix of output.
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Explain how the market reaches an optimal mix of output.
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Excess supply of textbooks due to increase in prices.
Excess demand for all others due to decrease in prices. |
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Define a market failure.
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An impercetion that prevents optimal outcome
Market mix does not equal optimal mix. |
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What are the major causes of market failure?
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Public Goods
Externalities |
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Define private good.
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Consumption by one exclused consumption by others.
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Define public good.
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Consumption by one does not exclude consumption by others.
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Explain the free-rider dilemma.
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Lack of revealed preferences leads to lack of demand which leands to lack of output. (under-production)
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Why are public goods under-produced?
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When there is an inability to exlcluse non payers.
Ex. Music (ppl can trade songs) |
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Why are private goods over-produced?
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Social demand is less than market demand then optimal output is less than market output.
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What is externality?
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Costs or benefits of a market activity imposed on a third party.
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Explain the difference between social demand and private demand.
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Social- Everyone affected
Private- Directed consumers/ buyers |
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Why do positive externalities lead to under-production?
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Social demandd > market demand (consumers benefit more than producers) then
Optimal output > market out put (lack of output) Optimal price> Market Price = under valued |
