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