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150 Cards in this Set

  • Front
  • Back
  • 3rd side (hint)
Fixed Costs
No matter how much you produce, fixed costs stay the same.
Law of Diminishing Marginal Production
Given a fixed amount of capital, adding more and more inputs, at first, increases output; however, output would eventually fall.
Average Total Cost is U-shaped because
Average variable cost is U-shaped.
Average Variable Cost is U-shaped because
The Law of Diminishing Marginal Production
As quantity increases, average variable cost
Gets closer and closer to average total cost, but never touch.
As quantity increases, average fixed cost
Is approaching zero.
Purely Competitive Market
1. Large number of buyers and sellers
2. Homogeneous Goods
3. Free entry and exit
4. Perfect information
Large number of buyers and sellers so that
No one person can control the market
Zero Economic Profit
Firm is earning a normal rate of return on their investment.
Average total cost is _____ to _____ at its lowest point.
Average total cost is tangent to marginal revenue at its lowest point.
Where will ever firm operate in order to maximize profit?
Where marginal revenue equals marginal cost.
One seller
One buyer
Homogeneous Good
Consumer can’t tell the difference
Free Entry and Exit
No barrier in entering the market.
Barrier to Entry
Government laws and regulations that prohibit competition.
Perfect Information
Everyone knows what’s going on in the market.
Demand Facing the Firm
d-Firm is so small, relative to the world market, no matter how much they produce, they can sell it.
Price at which the firm must sell the good
p-Based upon the world market price.
Price Taker
Can’t sell above or below the world market price.
Every firm will set price where marginal cost _____ marginal revenue.
Whenever marginal revenue lies above minimum average total cost, the firm is going to earn a _____.
Economic Profit
Short Run
Time period short enough that at least one input into your production process cannot be changed.
Long Run
Time period long enough so that inputs can be changed.
Factors of Production
Inputs into production.
In the short run, if price falls below the minimum average total cost, but above the average variable cost, what will happen to the firm?
The firm will keep operating.
In the short run, if the price falls below the minimum average variable cost, what will happen to the firm?
The firm will shut down.
In the long run, if the price falls below the minimum average total cost, what will happen to the firm?
The firm will shut down.
Two types of monopolies.
1. Schumpeterian Monopoly
2. Tulluckian Monopoly
Schumpeterian Monopoly
Transitive. “Who has the better mouse trap?”
Tulluckian Monopoly
Only way a monopoly can exist today is through the government cohesion. Government makes is illegal to compete against the monopoly.
Price Searcher
Any firm where the marginal revenue curve is no perfectly elastic.
Where do monopolies set their price?
At the demand curve.
Dead Weight Loss
The fall in total surplus that results from a market distortion.
Monopolistically Competitive Market
1. Large number of buyers and sellers.
2. Heterogeneous Goods
3. Free entry and exit
4. Perfect Information
Heterogeneous Goods
Consumers can tell the difference.
If the monopoly price lies below the average total cost, what is it surffereing?
Monopolistic Loss
How can a monopoly increase demand?
What kind of market can advertise?
Only monopolistic markets
The average fixed cost graph is _____.
Average total cost is _____ to marginal revenue.
When average total is tangent to marginal revenue, this shows what?
The firm is earning zero economic profit.
Where will a firm operate to earn a maximum profit?
Where marginal revenue equals marginal cost to earn a maximum profit.
Where do monopolies set their price?
Where marginal revenue equals the demand price.
In a monopolistically competitive market, why is the demand curve relatively inelastic?
Because the market is very competitive.
In a monopolistically competitive market, demand will increase and become more elastic due to _____.
Laws or rules handed down by government to control commerce.
Four Theories of Regulations
1. Public Interest Theory
2. Capture Theory
3. Economic Theory of Regulation
4. Gary Becker
Public Interest Theory of Regulation
Regulations are past to prevent market failure. Two reasons for market falure: Natural Monopoly and Exterality. Doesn’t expain regulations.
Natural Monopoly
Two firms couldn’t have enough demand to continue to run.
Samuel Insull
Got all electric presidents to tell state government to regulate tax and prices on electricity.
When you either pay or receive the benefit of a cost you had nothing to do with.
Two Types of Externalities
Positive and Negative
Positive Externality
Receiving the benefit
Negative Externality
Pay the cost (not necessarily money).
Capture Theory
Regulations are past, not to benefit the consumer, but to benefit the industry being regulated.
The industry hires (captures) the regulators to interpret them because they are so vague.
Doesn’t explain regulations.
Economic Theory of Regulation
(Stigler & Peltzman)
Politicians only want to be re-elected (money and votes).
Two groups most likely to have regulations past: Monopolies and the very competitive industries.
Doesn’t explain regulations.
What are monopolies protected by?
The government
Why do competitive industries want to be regulated?
To control who enters the market.
Gary Becker
Fixed finite amount of influence in the world.
Who ever has the most influence at a point in time will have regulations past on their behalf.
Doesn’t explain regulations.
Sherman Antitrust Act Sec. 1
Price fixing is illegal, per se (in or of itself).
Will go to jail.
Price Fixing
Firms come together and decide on a price.
Four problems with concentration ratios
1. Remain stable, even when two firms switch places.
2. Ignore the impact of foreign firm s selling in the U.S.. Only looks at the U.S. firm’s
3. Based on the SIC Codes and do no take into account substitutability.
4. Ignores geographic concentration.
SIC Codes
Standard Industrial Classificiation Code
Four Largest Cereal Companies
Kellog, General Mills, Post, and Quacker Oats
Concentration Ratios
A measure of the degree to which the largest firms in an industry account for total industry sales.
Two Antitrust Government Agencies
1. Federal Trade Commission
2. Department of Justice
Regulations established by laws and government that attempt to preserve competition.
What are regulations used for?
To eliminate competition.
Why don’t cartels work?
Because someone cheats. One company will sell slightly cheaper and drive price down.
Example of a Cartel
Organization of Petroleum Export Companies (OPEC)
A group of firms which come together and act like a monopoly.
5 Steps to Allow Mergers in Court
1. Define product (market).
2. Calculate concentration pre/post merger.
3. Look at entry conditions.
4. Look at all other factors.
5. Is it possible to increase efficiency without the merger.
Federal Trade Commission Act
Makes illegal all unfair forms of business competition.
Territorial Restraints
Can’t be told where to sell a product.
Exlusive Dealings
To sell a vendor’s product, can’t sell other products.
Requirements Contract
Buyin one thing and having to buy a bumch of others with it.
Tying Arrangements
Having to buy two things to get one.
Clayton Act Sec. 3
Makes tying arrangements, requirements contracts, exlusive dealings, and territorial restraints illegal.
Price Discrimination
Charging different prices to two different groups where the difference in prices is not based on cost.
Three Things to be Price Discrimination
1. Two separate and easily identifiable groups.
2. Firm must have some form of monopoly power.
3. There can be no arbitrage (act of buy a good and selling it for profit).
Clayton Act Sec. 2
Makes price discrimination illegal where the effects of such tend to decrease competition or tend to create a monopoly.
Sherman Antitrust Act Sec. 2
Makes monopolies, or the attempt to monopolize, a felony.
Breaks up company.
Which antitrust department gets the big cases and why?
Department of Justice
Sunk Cost
Money lost when project is cut off.
If change in HHI is greater than 100, the maerger is _____.
Not allowed.
If the change in HHI is between 50-100, the merger _____.
Needs further study.
If the change in HHI is between 0-50, the merger is _____.
Not challenged at this point.
Measuring change in the HHI
∆HHI = (a+b)2 = a2+b2+2ab
If HHI lies between 1,800-10,000, the market is _____.
If HHI lies between 1,000-1,800, the market is _____.
Moderately Concentrated
If HHI lies between 0-1,000, the market is _____.
Hirshman-Herfinduhl Index
HHI = ∑s2
What shape does the AFC curve have? Why?
Asmptotic; TFC stay the same
Consider the maerket for Sony XJ7 DVD players. What sort of market is this?
Monopolistically Competitive Market
Responsive to the change in price. Flat curve.
Elastic demand is _____ than one is inelastic.
Price Elasticity of Demand
A measure of the responsiveness to consumers to a change in price.
Elastic demand is _____ than one is elastic.
If you _____ the price, you want the demand to become elastic, because you want to sell more.
If you _____ the price, you want the demand to remain inelastic, because you don’t want you customers to leave.
A price floor always lies _____ the equilibrium.
Consumer Surplus
The amount that consumers are willing to pay for a good or service, but did not have to.
Minimum Wage
Always hurts the people it’s supposed to help.
Producer’s Opportunity Cost
The value of everything a seller must give up to produce a good.
An effective price floor always causes a _____.
Producer’s Surplus
Producer’s economic profit.
Calculating Supply & Demand
1. Solve for Quantity Demanded and Quantity Supplied
2. Find the Equilibrium
3. Solve for Quantity Demanded
4. Find the Consumer Surplus
5. Find the Producer’s Surplus
6. Find the Producer’s Opportunity Cost
Price Floor
Minimum that can be charged for a good or service.
Ex. Minimum Wage
Price Ceiling
Maximum that can be charged for a good or service.
Quantity Demanded
The amount that will be purchased at a particular price.
Five Reasons for Change in Demand
1. Change in Tastes or Preferences
2. Change in Laws
3. Change in Expectations
4. Change in Income
5. Change in Price of Other Goods
A good made illegal causes a(n) _____ in demand.
A good made legal causes a(n) _____ in demand.
Demand Schedule
A table that shows the relationship between the price of a good and the quantity demanded.
Supply & Demand
When prices fall, we buy more.
When prices rise, we buy less.
The amount of any good or service that will be purchased at any given price.
Law of Demand
As price rises, demand falls; as price falls, demand rises.
Law of Supply
As prices rise, quantity rises.
As demand rises, price rises to account for labor and expenses to keep up with the market.
What is the only thing that changes the supply curve?
If someone enters or leave the market.
What is the only thing that changes the quantity demanded?
A change in price.
Price and quantity is determined by all buyers and sellers as they interact in the marketplace.
A good in place of another good.
Ex. Name brand vs. Generic
Two goods bought together.
Ex. Peanut Butter and Jelly
Inferior Good
Income rises, demand falls.
Normal Good
Income rises, demand rises.
Tennis balls & Tennis Racquets
VCRs when income taxes lower
Inferior Good
Plasma TVs when income rises
Normal Good
Margarita Mix and Tequila
If there wasn’t a price ceiling, people from all over would be brining in the goods or services that are needed causing what?
Supply to increase, which would drive down the price.
A _____ is good for the moment, but hurts society in the long run.
Price Ceiling
An effective price ceiling always causes a _____.
Economics shows what?
People with the most value for a good will get it (if they are willing to pay the money).
Anti-Price Gauging Law
After a national disaster, can’t raise the prices of products or services.
Bryan and Oscar Meyer
A price ceiling is always _____ the equilibrium.
It is a constant effect of finding the _____.
_____ affect quantity. Quantity doesn’t affect _____.
The coming together of buyers and sellers whose joint decisions determine the price.
Where quantity demanded equals quantity supplied and there are no unintended shortages or surpluses.
We know from the law of supply that if a producer wants to increase production, his costs will rise, therefore, he must charge a higher price for the good. However, we also know that as more goods are sold on the market, the price falls. Explain this discrepency.
Other's will enter into the market and will help drive the price down.
Define Opportunity Costs
Total explicit and inplicit costs given up to do something else.
An increase in supply or demand is alwasy a shift in which direction?
The right
The only thing that will change quantity demanded is a change in _____.
What is the difference between demand and quantity demanded?
Demand is any good or service that will be bought at any given price.
Quantity demanded is any amount of goods or services that will be bought at a perticular price.
What is equilibrium?
Where quantity demanded equals quantity supplied and there are no unintended shortages or surpluses.
A price-ceililng is a legal _____ price on any good. or service.
An effective price-floor always lies _____ the equilibrium.
A _____ alwasy causes a shortage.