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207 Cards in this Set
- Front
- Back
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What is the dw loss
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The deadweight loss amounts to six dollars
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firms with brand names usually
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spend more on advertising, charge higher prices for their products
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A competitive firms demand curve
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horizontal line marginal revenue equals price
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A normal good is
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income rises demande rises
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a tax causes what on the demand curve
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movement along
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a tax imposed on the buyers of a good will lower the
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Price received by sellers and lower the equilibrium quantity
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all else equal, what happens to consumer surplus if the price of a good increases
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consumer surplus decreases
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almost all variations in living standards is an attribute to differences in countries
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productivity
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area C represents
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consumer surplus to new consumers who entered the market when the price falls from p2 to p1
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at equilibrium, producer surplus is measured by the area
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CFG
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average total cost for natural monopoly
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declining average total cost with more production
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Bill is restoring a car and has already spent $4000 on the restoration he expects of to be able to sell a car for $6200. Bill discovers that you need to do an additional $2400 of work to make the car worth $6200 to potential buyers. He could also sell the car now without completing the additional work for 3800 what,should he do?
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it doesn't matter of bill sells the car now or completes the work and sells it at the higher price because the outcome will be the same either way
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Bobby pays all those workers the same wage and labor and hands only variable costs from this information we can conclude that Bobby's average variable cost decreases
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as output rises from 0 to 26 but rises after that
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burden of tac on sellers is
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six dollars
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cartel and an example of it
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Group of firms acting unison
ex- t-Mobile and Verizon in the outcome with collusion |
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collusion& an example of it
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agreement among firms in a market about quantities to produce or prices to charge... it is an example of duopoly
ex- t-Mobile and Verizon could agree to each produce half of Monopoly output |
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concentration ratio
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percent if the markets total output supplied by the 4 largest firms
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consumer surplus before trade is
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$5400
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critics of advertising would say(3)
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1.)society is wasting its resources
2.) they manipulate people's tastes 3.) it impedes competition – it creates the perception that products are differentiated than they really are, allowing higher markups |
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critics of brand names believe(3)
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1.) consumers perceive differences that do not exist
2.) consumers WTP for brand names is irrational, fostered by advertising 3.) eliminating government protection of trademarks will reduce influence of brand names, result lower-prices |
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defenders of Brand names (2)
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1.) provides information about quality to consumers
2.) give companies incentive to maintain quality |
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difference between monopoly a competative market
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Monopoly has market power
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differences between perfect competition and monopolistic competition
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perfect competition-products are identical, they are the price takers, demand curve is horizontal
monopolistic competition- differentiated products, has market power, downward sloping demand curve |
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difficulties for oligopoly firms with cartels
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it is difficult for oligopoly firms to form cartels and honor their agreements
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dominant strategy
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strategy that is best for player In a game regardless of the strategies chosen by the other players
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duopoly
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an oligopoly with 2 firms
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during factory shutdown only at add the.....costs
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factory
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each firm in a monopolistically competitive market has(2)
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1.) excess capacity – it produces less than the quantity that minimizes ATC.
2.) charges a price above marginal cost |
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economic models
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are simplifications of reality and in this respect economic models are no different from other scientific models
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economists study
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management of scarce resources
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example of Nash equilibrium
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Verizon Q= 40 T-Mobile's best move is to produce 40 as well
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example that defends advertising
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more expensive glasses were advertising is prohibited
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examples of price discrimination
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discounted movie tickets, airline tickets, coupons, need-based financial aid, quantity discounts.
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examples of prisoners dilemma in the real world (2)
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1.) arms race between military superpowers; each country be better off if both disarm, but each has a dominant strategy of arming
2.) common resources; would be better off if everyone conserved common resources, but each person's dominant strategy is over using the resources. |
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from this figure it is apparent that
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Vietnam has a comparative advantage in producing rice relative to the rest of the world
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Game theory
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study of how people behave in strategic situation
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game theory is the study of
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how people behave in strategic situations
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high concentration ratio
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less competition
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how can a monopoly increase total surplus
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increase quantity
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how do you calculate the losses for monopolistic competition
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lhj
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how do you find DW loss for monopoly
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triangle between equilibrium quantity and price for a competitive firm, MC for monopoly, P for monopoly
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how do you find multiunit profit for a monopoly
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( P - ATC ) x Q
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how do you find one unit profit for a monopoly
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P - ATC
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how do you find the diminishing marginal product of labor on chart
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see where the # goes down with additional input
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how do you find the opportunity cost of two columns of different product amounts
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The left is the constant and the right, find how much each increment goes by
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how do you find the quantity and price for a monopoly
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where marginal revenue equals marginal cost that is the quantity. go up to the demand curve to find the price
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how do you get accounting profits
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add up physical things not opportunity costs
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how do you measure consumer surplus
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The area between the demand curve and the equilibrium price
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how does the government go about breaking up monopolies
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they set their price so that price equals ATC for 0 economic profit
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how does the government increase competition with monopolies. examples (2)
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antitrust laws, band some anticompetitive practices, allow government to break up monopolies. Sherman antitrust act, Clayton act
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if a consumer is willing and able to pay $20 for particular good and pays $16 for the good, then for that consumer, that consumer surplus amounts to
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four dollars
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if a movie goer often purchases popcorn to eat what would happen to the equilibrium price and quantity of popcorns if the price of the movie ticket falls
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The equilibrium price and quantity would increase of popcorn
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if an economy can produce more of one good without giving up another good then the economies production point curve is
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inefficient
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if price floor is below the equilibrium price what effect will it have on the quantity sold in the market
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it wont have an effect
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if profits in the short run for a monopolistic competition
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New firms enter the market taking some of the demand away from existing firms, prices and profits fall
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if someone requires less inputs as another person then they have
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absolute advantage
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if the supply curve iss', the demand curve is D, the equilibrium price $150 what is the producer surplus
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$625
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if the. supply curve is asthma demand curve shows from D to D', what is the change in producer surplus
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producer surplus increases by $3125
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in a monopoly what is the relationship between marginal revenue and price
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marginal revenue is less then price
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in general in a monopolistic competitive industry the more differentiated the products...
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The more advertising firms buy
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in monopolistic competition why is mark up over marginal cost bad and why cant policy makers help
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The quantity is below the socially efficient quantity
cant help- firms earn 0 profits so they cant require them to reduce prices |
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in monopolistically competitive industries, what naturally leads to advertising
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product differentiation and markup pricing
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in perfect competition price equals
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mc
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in the 1990s inflation in the United States was
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about 3% per year
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In the circular flow diagram firms produce goods and services using
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The factors of production
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in the circular flow diagram what do firms do
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produce goods and services using the factors of production
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in the circular flow diagram what to the two loops represent
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one represents the flow of goods, services and factors of production another represents corresponding flow dollars
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is a firm is facing elastic demand then the firm should
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decrease price to increase revenue
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is producing soccerball cost Jake five dollars, and he sells it for $40, his producer surplus is what
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$35
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Justin builds fences for a living. Justin out-of-pocket expenses plus a value that he places on his own time amounts to his
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cost of building fences
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long-run monopolistic competition
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in monopolistic competition, entry and exit drive economic profit to zero
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losses in the short run for monopolistic competition
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some firms exit the market, remaining firms enjoy higher demand and prices
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market determined prices are better than government determined prices because they reflect
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The value of the god to a society and the cost of making
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market failure caused by externality, what is an example of this
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a species of fish die off due to pollution in a river where it once lived
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market is efficient if
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WTP=MC
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monopolistic competition definition
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many sellers, product differentiation, free entry and exit
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monopolistic competitive firm with losses of the sort run
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P<ATC
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monopolistically competitive market has (3)
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many firms, differentiated products, free entry
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Monopoly and monopolistic competition differences
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monopoly-one seller, no free entry and exit, positive long-term economic profits, no close substitutes.
monopolistic competition- many sellers, free entry and exit, zero long-term economic profit, many close substitutes |
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Monopoly equilibrium for price, marginal revenue and marginal cost
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P> MR = MC
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Nash equilibrium
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situation in which economic participants interacting with one another choose best strategy given the strategies that all the others have chosen
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non-smokers develop lung cancer caused by exposure of public smoking this is an example of
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market failure caused by externality
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noncooperative oligopoly equilibrium (bad for?,good for?)
sometimes it will...... |
-bad for oligopoly firms (prevents from achieving monopoly profits),
good for society (Q is closer to the socially efficient output P is closer to MC) -May reduce social welfare |
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Obama stimulus package and increase government spending following the deep economic downturn and 2009 and 2008 was to reduce
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unemployment
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oligopolies form a cartel ln hopes of reaching the monopoly outcome they
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become players and a prisoners dilemma
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oligopoly
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few sellers offer similar or identical products
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oligopoly is a market with...
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market with high concentration ratios
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on a graph, the area below a demand curve and above the price measures
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comsumer surplus
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on the PPF curve going from a point inside the curve to a point on the curve what is opportunity cost
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zero
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one result of a tax, regardless of whether the tax is placed on the buyers or sellers, is that
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both buyers and sellers are made worse off
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OPEC;
-goal -cycle |
-restricting the production of oil to keep the price high
-they increased the price of oil from 1970 - 1980. 1980 new sources of oil supply opened up and OPEC lost control of the global market and the price fell. 1980s price stability. 2003-2008 demand increased & OPEC regained control of market again |
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out of the choices; wages, land, capital, goods and services sold. which doesnt represent the inputs and outputs on the circular flow diagram
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wages
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output effect
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higher output raises revenue
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people for advertising believe (3)
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1.) provides useful information to buyers
2.) informed buyers can more easily find and exploit price differences 3.) promotes competition and reduces market power |
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perfect price discrimination
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monopolist gets all consumer surplus as profit. there is no deadweight loss
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Point moves on the same horizontal or vertical line on ppf curce opportunity cost is
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there isn't one
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Price effect
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lower price reduces revenue
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Price increases for monopoly firm then quantity
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decreases
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prisoners dilemma
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Game between two captured criminals that illustrates why corporation is difficult even when it is mutually beneficial
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prisoners dilemma example: 1 silent&confess, 2 silent&confess
nash equilibrium&why what do they choose? how are they better off? why dont they choose that? |
1 silent – 20 years in jail
1 confess- free 2 confess– 8 years in jail 2 silent-1 year in jail nash: both confess- if you confess you can either go free or have 8 years, if you are silent you will have 20 years or 1 they choose-to confess (8 yrs) better off-both silent(free) why they didnt- self interest takes over and leads them to confess |
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problems with oligopolies and what the policy makers can do
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problem- production is too low and prices are too high, relative to the social optimum
policymakers – promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome |
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real-world price discrimination
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not possible because no firm knows every ones WTP. they relate WTP on observable trait that is related to their appearance such as age
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Scientific models and economic models do what
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simplify reality in order to make our understanding of it
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Sherman antitrust act & Clayton antitrust act
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sherman- forbids collusion between competitors
clayton- strengthened rights of individuals damaged by anticompetitive arrangements between firms |
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t-Mobile and Verizon prisoners dilemma
agreement-Q=30 revenge-Q=40 1:30&40? 2:30&40? |
1 30-750
1 40-1000 2 30-900 2 40-800 |
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The amount of money that a firm receives from the sale of its output is called
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total revenue
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The benefit to the government is measured by
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tax revenue and it's represented by the area B+ D
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The business stealing externality
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losses incurred by existing firms when new frims enter market
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The change in total surplus in this market because of trade is
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D,and this area represents again in total surplus because of trade
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The demand curve reflects
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willingness to pay of all buyers in the market, value each buyer in the market places on a good, highest price buyers are willing to pay for each quantity
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The equilibrium, consumer surplus is measured by the area
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AFG
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The product variety externality
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surplus consumers get from the introduction of new products
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The production possibilities frontier is a graph that shows the various combinations of output that and economy can possibly produce given available factors of production and
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The available production of technology
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The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that
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Arthur Laffer was correct when he asserted that tax cut rates would increase revenue
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The rules established under GATT are enforced by the
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WTO
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The supply curve is very inelastic and the demand curve is very elastic in a market, who will bear a greater burden if a tax is imposed
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The sellers
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The unfair competition argument might be cited about American who believes that
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The French government subsidies to French farmers justify restrictions on American imports on French agricultural products
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The value of the price elasticity of demand for a good will be lat relatively large when
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The good is a luxury rather than a necessity
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The word "economy"comes from the Greek word oikonomos which means
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one new manages a household
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total surplus in the market will increase when the government
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removes a binding price ceiling from the market
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what are barriers to entry
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where other firms cannot enter market. single firm owns a key resource or government gives single firm the exclusive the right to produce a good
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what can't be shown by the production possibilities frontier
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equality
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what do economists study
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The management of scarce resources
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what do good assumptions do
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simplify a problem without substantially affecting the answer
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what do the left and right boxes on the circle flow diagram represent
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firms and households
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what does an increase in price due to the supply curve versus what an increase in sellers does to the supply curve
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an increase in price is a movement along the supply curve where as increase in sellers is a shift in the supply curve
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what does comparative advantage mean
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Price is lower than the world price
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what does monopolistic competitor do in the long run
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entry and exit that occur until P= ATC and Profit= zero
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what does the demand curve look like when it is perfectly inelastic
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vertical
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what does the government's tax revenue do when the size of the tax increases
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it rises then falls
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what does the production possibility frontier show
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efficiency, opportunity cost, trade-offs
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what happens to the demand curve if the price of olives rise
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movement up left along demand curve
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what is a monopoly
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firm that is a sole seller of a product without close substitutes
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what is a natural monopoly
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single firm can produce entire market quantity at lower-cost then other firms
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what is efficient on the opportunity cost curve
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anything on the PPF curve line
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what is market power
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The ability to influence the market of the product it sells
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what is Price discrimination and an example of it
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selling the same good at different prices to different buyers. An example is a firm can increase profit by charging a higher price to buyers with higher WTP
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what is the best thing the government can do about monopolies
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nothing
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what is the broken window fallacy
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The government spending money on something will create new jobs
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what is the kidney donation price ceiling at
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zero
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what is the opportunity cost
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what you give up in order to get something
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what is the willingness to pay
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The maximum amount the buyer will pay for a good and measures how much the buyer values the good
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what of the 10 principles of economics does welfare economics explain more fully
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markets are usually a good way to organize economic activity
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when a country allows trade becomes an exporter of a good
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domestic producers gain and domestic consumers lose
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when a tax is put on the consumers or producers individually who will get the most impact
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they both get impacted
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when deciding to stick with a cartel firms would be better off....
but why wouldnt they do so |
they both stick to the cartel agreement
they have incentive to revenge on the agreement |
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when finding a firms profit on a chart
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profit= Qx(P-MC)
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when finding out how much production you give up to make something else you
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put smaller number on top divided by bigger number
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when firms in an oligopoly individually choose production to maximize profit, what is P&Q?
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oligopoly Q is greater than Monopoly Q, smaller than competitive Q
oligopoly P is greater than competitive P but less than monopoly P |
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when in our analysis of gains and losses from international trade we assume that a particular country is small we are
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making an assumption that is not necessary to analyze the gains and losses of international trade
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when income increases by 7% and quantity demanded increases by 12% the income elasticity of demand is
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positive
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when price effect is greater than the output effect for a monopoly then
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The income is negative
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when the government imposes a binding price ceiling in a market will the producer surplus in the market increase
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no
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when the government imposes tax on the market who looses surplus
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consumers and producers
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when the prisoners dilemma game is repeated many times.......
2 strategies |
cooperation may be possible
1.) rival revenge in one round, you revenge in all subsequent rounds 2.) "***-for-tat"- whatever rival does in one round, you do in the other round |
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when the taxes is imposed in this market sellers effectively pay what amount of the $10 tax
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four dollars
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Who can benefit from trade
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everyone benefits
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Who would study the effect of raising oil prices on demand for online courses
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microeconomist
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who would study The rising of oil prices on employment in the airline industry
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a microeconomist
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why do taxes cause deadweight loss
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they prevent buyers and sellers from realizing some of the gains from trade
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why does willingness to spend huge amounts on advertising reflect the quality of its products to consumers (3)
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1.) ads convince buyers to buy product once but product must be high-quality for people to become repetitive buyers
2.) The most expensive ads are not worthwhile unless they lead to repeat buyers 3.) when consumers see expensive ads they think the product must be good if the company is willing to spend so much on advertising |
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why is a monopoly the price maker
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Q does not depend on P, Q and P jointly determined by MC, MR and the demand curve
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why is it hard for policy makers to improve the market outcome for monopolistic competition
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imefficientcies are subtle not measure
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why is monopolistic competition less efficient than perfect competition
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excess capacity-they produce on downward sloping ATC curve. perfect competition produces the quantity that maximizes ATC
markup over martial cost- P>MC perfect comp: P=MC |
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why isnt a monopoly efficient
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it creates deadweight loss
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why will people pay more for a diamond then water
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The marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water
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will the demand for gasoline respond more to a change in price over five weeks Or five year period
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five year
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willingness to spend huge amounts on advertising may signal what
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Quality of its product to consumers, regardless of the content of ads
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with free trade this country will....., ..... # of goods
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export 65 baskets
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without price discrimination in a Monopoly
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there is deadweight loss and consumer surplus.
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you go to the movieplex when movies ordinarily cost $10. You are intending to see a movie for which you have $3 off coupon good for only that movie at that time however when you get there you see a friend who asks you if you'd rather see a new release. Both Movies Start and end at the same time. If you decide to see the new release of your friend what is your opportunity cost?
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The amount you value the first movie +3 dollars
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Resale Price Maintenance ("fair Trade")
-What is is? -Why opposed? Argument for that -Objective |
-manufacturer makes lower limits on prices retailers can charge.
-opposed because it looks like it reduces competition on retail level......Manufacturers dont gain from restricting competition on retail level -obj: preventing retailers from free riding on the services provided by full service retailers |
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Predatory Pricing
-What is it? Why? -Law&issues -Economists say... & 2 reasons |
- firm cuts prices to prevent entry/ drive competitor out of market. So firm can sell at monopoly price later
- illegal under antitrust laws. Hard for court to determine if price cut is preditory or beneficial to consumers -economists doubt it is rational. 1.) selling at a loss which is costly. 2.) can backfire |
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Tying
- What is it? Example? -Critics? -Supporters? -What can firms use tying for? -Law? |
-manufacturer bundles 2 products together and sells them for one price. Example- Microsoft browser& operating system
-critics: gives firms more market power by connecting weak products to strong ones. -supporters: doesnt give market power,buyers arent willing to pay more for two goods sold together versus sold seperately -use for: price discrimination which can help economic efficiency -Law:tying is legal |
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The US vs. Microsoft
-US says -Microsoft response -Outcome (3 steps) |
Us:
-monopoly power for PC operating systems -uses predictory pricing and tying agreements to achieve monopoly in market for web browsers. -uses other anti competitive practices to strengthen monopoly in these two markets Microsoft: -Windows competes withs Mac -Windows is best product so they dominate -Internet with windows 98 gives greater customer value -browser and operating system is one product Outcome: 1.) court said it was a violation of Sherman Act and company has to be broken into two parts. (producing operating systems, produces applications) 2.) Microsoft appealed 3.) court ordered Microsoft to reveal details of its codes to other software developers |
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How do policy makers regulate oligopolies
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antitrust laws
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How do oligopolists maximize profits
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form a cartel and act like a monopolist
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Larger # of firms in oligopoly
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closer the quantity and price levels would be under competition
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Game strategy: If one person decides to do one thing and you know what they did. How do you find your best option?
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Look at 2 categories and number sets with the option other person that their option gives you, choose option that would give you upper hand or equal to other person
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suppose two countries agreed to disarm existing weapons. In reality, why might these two countries may have a hard time keeping this agreement.
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Much like the prisoners dilemma, both countries are better off reneging on the agreement and building new weapons.
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If the government imposes a binding floor price on the market, what will happen to consumer surplus?
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It will decrease
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You sell a kayak for $600, but you are willing to sell it for $450. The buyer was willing to pay $650. What is the total surplus?
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$200
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The Laffer curve shows
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As size of tax increases, government tax rev rises then falls
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Do gains from trade exceed losses of losers for exporters or importers?
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Both
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Ecquador imposes a tariff on imported bananas. If the increase in producer suplus is $50 million, the reduction in consumer surplus is $150 million, deadweight loss from tariff is $30 million, how much revenue does the government generate?
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$70 million
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How do accounting and economic profit compare?
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accounting is greater than or equal to economic profit
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If MC of producing the 5th unit of output is higher than the ATC of producing the four units of output, then at 5 units of output what is ATC doing?
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Rising
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Diminishing marginal productivity implies that as one input increases, while other inputs remain constant, what happens to total product?
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total product increases, but at the decreasing rate
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A firms incentive to compare marginal revenue and marginal cost is an application of the principle that..
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rational people think at the margin
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If price decreases, consumer surplus
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increases
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efficiency in a market is achieved when
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sum of producer surplus and consumer surplus is maximized
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Total surplus on a graph
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area between demand and supply curve
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Erin is willing to pay $100 to have her house cleaned,Ernesto's OC of cleaning Erin's house is $70 per week.... Assume Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. What will Erin do and why?
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Clean her own house because 40+70=110
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Suppose England exports cars to Australia and imports cheese from Mexico. This situation suggests that
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England has the comparative advantage relative to Australia in producing cars, and Mexico has a comparative advantage relative to England in producing cheese.
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Suppose French subsidizes French wheat farmers, while Germany offers no subsidy to Germany what farmers. As a result of the French subsidy, sales of French wheat to Germany
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may prompt German subsidy, sales of French wheat to Germany
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For economic profits add
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everything, even OC
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Key characteristic for competitive market is
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producers sell nearly identical products
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for an individual firm operating in a competitive market, marginal rev equals
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average rev and the price for all the levels of output
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If you've been maximizing profit at a certain price and quantity and then the price falls, what should you do to maximize profit again
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lower quantity of output
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Situations that express a firm's profit-maximizing decision rule
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MR>MC: Firm should increase output
MR<MC: Firm should decrease output MR=MC: Firm should continue producing its current level of output |
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with trade scottland will
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export 11 units of wool
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if there are 500 identical firms in this market, what is the value of Q1
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150,000
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if this country allows free trade, will producers or consumers loose?
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consumers will gain and producers will lose
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consumer surplus with tarriff is
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a+b
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Comparative advantage
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produces good at a lower OC.. country exports good with lowest CA
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consumer surplus
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above price, below D
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producer surplus
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below price, above S
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