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30 Cards in this Set

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  • Back
Reasons for Monopolies- Barriers to entry
1. Ownership of resources without close substutes
2.Economies of cale and very high start up costs
3. Legal restrictions (franchises, patents, copyrights)
Natural monopolies
occur when one firm can produce at a lower per-unit cost than two or more firms
Profit maximizing quantity is when
MR=MC
Profit Maximization for a monomplist results in inefficient production from society's perspective because
P>MC

Monopoly does not produce at minimum LRAC in LR eqm
Features of Monopolistic Competition
Large number of firms but fewer than perfect competition implying:

a. each firm has a a small market share
b. price rigging is extremely difficult
c. firms in industry tend to act independently
2. Product differentiation
3. Ease of entry and exit
4. Advertising may increase profits
In short run equilibria
economic profits can be greater than zero as in Figure A (implying above average accounting profits) Less than zero ( implying below average accounting profits) or equal to zero ( implying normal or average accounting profits)
Long run equilibrium
Economic profits equal zero implying an average or a normal accounting profit.
Inefficient from a societal perspective because
Price> marginal cost
firms do not produce at minimum average cost in LR
Features of a oligopoly
1. Few firms in the market
2. Strategic dependence(have to think about what competitors are doing)
3. Barriers to entry are likely
a. economies of scale due to high-start up sosts
b. legal barriers
4.collusion (price rigging is possible
5. Economic profits may exist in the long-run due to barriers
6. Probably inefficient b/c price is likely> MC
7. Price to consumers charged by oligopolists may be lower than would be charged by many smaller firms-same with monopoly
Market Failure occurrs...
When an inefficient amount of resources are used to make a good or service
Market failure arises...
In a pure market system when externalities exist
Externality
occurs when production or consumption of a good or service affects one or more parties who are neither the producer nor the consumer
Negative externality or spillover cost
when producing or consuming something imposes a cost on a third party

ex. pollution, smoking
Positive exrernality or Spillover benefit
occurs when producing or consuming something gives benefits to a thiurd party

1. Vaccines, education
Government correcttions to move away from Equilibrium Private and towards equilibrium society
Taxes, Regulations, polution permits
Government corrections to move away from Ep and toward Es
Public provisions, subsidies, Regulation
A plot of the combinations of good where a consumer achieves the same level of utility is called an
Indifference curve
a plot of an indifference curve is called an
indifference map
A plot of the numbers above showing combinations that cost the same amount where a consumer exhausts his or her income is called a
budget constraint
maximum utility given the budget constraint occurs where
the indifference curve is tangent to the budget constraint
Full employment GDP
when unemployment is limited to frictional and structural unemployment
Recessionary Gap
actual GDP < Full employment GDP, usually has a large amount of cyclical
Inflationary Gap
actual GDP > Full employment GDP concern for inflation
What are the four central arguments of Keynes General Theory of Employment, INterest and Money?
1. Business cycles are not necessarily self correcting, 2) full employment GDP depends Critically on Aggragate demand and investment is a key component of AD, AD= C+ I + G+ (X-IM) 3) Sometimes I may not be sufficient to soak up all household savings ( see circular flow diagram) this can create unemployment (AGDP < PGDP) 4) To restore the economy to full employment when recession occurs the government should exercise fiscal policy. When there is a recession government can increase government spending and/or decrease taxes which with increase consumption.
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