Econ Test 4

Front 1

"Reasons for Exit and Entry" in Long Run Competative Equilibrium

Back 1

1. Change in demand
2. Change in costs

Front 2

"Necessary Conditions" for Long Run Competative Equilibrium

Back 2

1. The market clears (Qs = Qd)
2. Profit = 0; normal; P = ATC

Front 3

CONSEQUENCES: Decrease in demand

Back 3

1. D decreases
2. P and Q decrease
3. d = MR
4. q* decreases,; pi < 0
5. Exit ( S decreases)
6. Q falls and P returns to normal
7. d = MR returns to original
8. q* returns to original; pi = 0

Front 4

CONSEQUENCES: Increase in costs

Back 4

1. MC and ATC increase
2. q* decreases; pi < 0
3. Exit (S decreases)
4. Q falls and P rises
5. d = MR increases
6. q* increases; pi = 0

Front 5

CONSEQUENCES: Decrease in costs

Back 5

1. MC and ATC decrease
2. q* increases; pi > 0
3. Entry (S increases)
4. Q rises and P falls
5. d = MR decreases
6. q* decreases; pi = 0

Front 6

CONSEQUENCES: Increase in demand

Back 6

1. D increases
2. P and Q increases
3. d = MR increases
4. q* increases; pi > 0
5. Entry (S increases)
6. Q rises and P returns to original
7. d= MR returns to original
8. q* returns to original; pi = 0

Front 7

Productive Efficiency

Back 7

1. P = min ATC
2. Opportunity cost of resources is minimized
3. Output of all other goods is maximized

Front 8

Allocative Efficiency

Back 8

1. P = MC
2. Everyone willing to pay at least MC will get the good
3. Social welfare is maximized

Front 9

Monopoly

Back 9

a single seller in an industry

Front 10

Monopoly Characteristics

Back 10

1. Single seller
2. No close Substitutes
3. High barriers to entry

Front 11

MONOPOLY: Implication of "single seller"

Back 11

Market D = firm d

Front 12

MONOPOLY: Implication of "no close substitutes"

Back 12

price maker

Front 13

MONOPOLY: Implication of "high barriers to entry"

Back 13

LR pi can be > 0

Front 14

Price maker

Back 14

producer that finds the profit-maximizing P/Q combination

Front 15

MONOPOLY: Types of Barriers to Entry

Back 15

1. Economies of scale (the more you produce the cheaper per unit)
2. Government-created barriers (patents and licenses)
3. Control of an Essential Resource (NFL, DeBeers diamonds)

Front 16

MONOPOLY: Profit Maximization

Back 16

MR does NOT = D
-->when D is downward sloping, the producer must lower the price in order to increase output. Thus, MR < P

Front 17

MONOPOLY: Profit maximization relationship betwen MR and P

Back 17

MR and P are the same initially, then MR falls twice as fast

Front 18

MONOPOLY: MR and D comparison equations

Back 18

D: P = a - bQ
MR = a -2bQ

Front 19

MONOPOLY: SR Profit maximization graph analysis

Back 19

Find Q* where MR = MC --> continue to Demand curve to find P*

--> DUE to high barriers to entry: SR pi = LR pi

Front 20

Price discrimination

Back 20

the practice of charging different groups of buyers different prices based on differences in Ed

Front 21

3 conditions necessary for Price Discrimination

Back 21

1. Same degree of market/monopoly power
2. Two or more groups of buyers with different elasticities
3. Prevention of resale

Front 22

Price Discrimination: ELASTIC (shallow slope)

Back 22

1. lower price
2. more options
3. lower opportunity cost

Front 23

Price Discrimination: INELASTIC(steep slope)

Back 23

1. higher price
2. fewer options
3. higher opportunity cost

Front 24

Cases AGAINST monopoly

Back 24

1. contrived scarcity
2. deadweight loss

Front 25

Contrived scarcity

Back 25

-case against monopoly-
making goods SEEM more scarce than they are.

Qm < Qpc ; Pm > Ppc

Front 26

Case FOR monopoly

Back 26

1. Technological advance- IF monopoly spends pi on reearch and development, then monopoly may create faster growth over time

Front 27

Monopolistic Competition Characteristics

Back 27

1. Many small buyers and sellers
2. No barriers to entry
3. Differentiated products (i.e coke and pepsi)

Front 28

Monopolistic Competition Characteristics

Back 28

1. Many small buyers and sellers
2. No barriers to entry
3. Differentiated products (i.e coke and pepsi)

Front 29

MON. COMP. Implications of "many small buyers and sellers"

Back 29

no individual can affect Pe or Qe

Front 30

MON. COMP. Implications of "no barriers to entry'

Back 30

LR pi = 0

Front 31

MON. COMP. Implications of "differentiated products"

Back 31

Advertising/price makers

Front 32

MON. COMP. SR profit Maximization

Back 32

negative profit is possible in the short run

Front 33

MON. COMP. LR profit maximization

Back 33

When pi > 0 in the SR, then in the LR:

1. Firms enter
2. D and MR fall
3. P* and Q* fall
4. pi = 0

Front 34

Advertising

Back 34

a seller's activites in communicating its message about its product to potential buyers.

Front 35

Goals of Advertising

Back 35

1. increase D
2. decrease Ed

Front 36

Positive effects of advertising

Back 36

1. decreases search and information costs
2. facilitates the introduction of new products

Front 37

Conditions for advertising

Back 37

many sellers = small demand
close subs = highly elastic demand

Front 38

Potential negative effects of advertising

Back 38

1. May be persuasive rather than informative, designed to alter preferences
2. May establish brand-name loyalty; increasing monopoly power
3. Competing ads may cancel each other out, resulting in a waste of resources that does not alter demand

Front 39

Cases AGAINST Monopolistic Competition

Back 39

1. P > MC - no allocative efficiency
2. Excess capacity- Q* is below output where ATC is minimized

Front 40

Case FOR Monopolistic Competition

Back 40

1. Expanding consumer options through product variety adds the value by more fully matching consumer tastes

Front 41

Oligopoly Characteristics

Back 41

1. Few, mutually interdependent firms
2. high barriers to entry
3. Imperfect information

Front 42

OLIG. Implications of "few, mutually interdependent firms"

Back 42

actions of 1 firm will affect the market

Front 43

OLIG. Implications of "high barriers to entry"

Back 43

LR pi can be > 0

Front 44

OLIG. Implications of "imperfect information"

Back 44

strategic cheating is possible

Front 45

Collusion

Back 45

cooperation among firms to raise each others' profit

Front 46

Cartel

Back 46

agreement among firms to restrict output to achieve monopoly power

Front 47

Random Cartel Facts

Back 47

1. Cartels are illegal in the U.S.
2. When all the members follow the rules, firms split monopoly profit
3. Cartels can increase profits to all firms regardless of product type

Front 48

Game Theory

Back 48

2 players make 1 decision independently and at the same time; move of the other player is unknown

Front 49

Prisoner's Dilemma

Back 49

game in which the pay offs are such that the choice set that maximizes total welfare fails to maximize personal welfare

Front 50

Maximum TOTAL welfare

Back 50

highest sum of profits

Front 51

Maximum INDIVIDUAL welfare

Back 51

determine best choice in each scenario

Front 52

Factors that BREAKDOWN collusion

Back 52

1. Large # of sellers
2. differentiated products
3. differences in cost
4. antitrust policy