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50 Cards in this Set

  • Front
  • Back
Process a firm uses to produce
Tech. Change
Change in ability to produce given output with given input
Short run
period of time in which at least one input in fixed
Long run
period of time in which firm can vary all inputs, adopt tech, change size, or shut down
Explicit Costs
costs that involve expenditure of money
Implicit Costs
non-monetary opp. costs
Law of Diminishing Returns
Additional output from one more worker eventually decreases and becomes negative
How is marginal product related to marginal cost?
They are mirror images of each other
Economies of Scale
In long run, ATC decreases as Q increases
Returns to Scale
relationship between inputs and outputs. Increasing, Double Q -> More than double P
Perfectly Competitive Markets
Large # of Firms, identical product, easy entry
Monopolistic Market
Large # of firms, differentiated product, easy entry
Few Firms, Identical or Differentiated product, difficult entry
One firm, unique product, impossible entry
Price Taker
buyer or seller that is unable to affect market price
Profit Maximizing Point
Marginal Revenue = Marginal Cost
Profitable, Breaking Even, Operating at a loss
MR>ATC, Profitable
MR=ATC, Breaking even
MR<ATC, Operating at a loss
Sunk Cost
Costs that have been paid and cannot be recovered
MC = Supply curve
MC above min point of AVC
Allocative Efficiency
Marginal Benefit, price, willingness to pay just equals Marginal Cost
Monopolistic Demand Curve
Downward sloping, elastic
Accounting Profit
Profit of explicit costs
Economic Profit
Profit including explicit and implicit
Monopolistic Efficiencies
Allocative efficiency: P=MC
Productive: ATC min point
Entrance of Firms to market (monopolistic)
Demand shifts left and becomes more elastic
Sources of Oligopoly barriers
1. Economies of Scale
2. Ownership of key input
3. Gov. imposed barriers: patents
Game Theory
Study choices firms make under condition of independence
Game 3 characteristics
1. Two players (duopoly)
2. Strategies
3. Payoffs: profits
agreement to charge certain price
Nash Equilibirum
Situation in which each firm chooses dominant strategy. Neither firm can improve payoff given rival
Methods of escape from prisoner's dilemma
means of escaping rivalry
cooperate & punish
not advertise, monitor, and react
price matching
Match opponents prices, results in higher price
price leader
one firm sets price, others match it
randomized prices
random things on sale, customers can't tell whats cheap and what isnt
How do payoffs change with repeated interactions and price matching
3 boxes with lower payoffs, (nash equilibriums) and 1 cooperative high price
Sequential move games
multiple moves
4 Sources of blocked entry four monopolies
1. Gov: first class mail
2. control of key resource
3. network externalities
4. large economies of scale
Market power
Ability of firm to charge a price greater than average cost
Anti-trust laws
Sherman anti-trust act 1890
- sued microsoft 1998
- sued standard oil 1911
monopoly barriers to entry
1. Gov: patent, copyright
2. control of key resource
3. network externalities
4. Econ. of scale (natural mono)
Cooperative equilibrium
cooperative, sometimes collusive, price
implicit collusion
explicit collusion
implied/unofficial collusion
actual collusion
Four firm concentration ratios
flawed: do not include sales from foreign firms, based on national(no local), Comp. can exist between industries
Subgame-perfect equilibrium
nash equilibrium in a sequential game
if you own only hardware store in town, do you have a monopoly
Yes, if profits are not competed away in long run
Relevant market has been identified if:
price increase results in higher profits; otherwise the market is defined too narrowly
3 main parts of merger guidelines involve:
1. market definition
2. measure of concentration
3. merger standards
HH index: 4 firm concentration measure
ex: 4 firms, 30%,30,20,20 shares of market. HHI=30^2+30^2+20^2+20^2 = 2600
merger guidelines
HHI below 1000: no challenge
1800+: no challenge if change under 50pts, definite challenge above 100 pts