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44 Cards in this Set
- Front
- Back
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Keys to having a Monopoly
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A firm with lone seller of a product with no close substitutes (Martha and her doughnuts. No subs because product or service is “unique and/or non-reproducible” Barriers exist for entry into the market, 3Total Market Power!
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Keys to having Perfect Competition
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Many Sellers, Identical Products, Entry in to market (and leaving) is easy, No Market power
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Barriers to entry
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In order for a firm to maintain its monopolistic position there must be “forces” that block the entry of new firms into the market. Three barrier are legal, Economies of Scale, and Exclusive ownership of an essential resource
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Types of Legal Barriers
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Public Franchise, Patents, copy rights, license, trade restrictions
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Public Franchise
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The government grants one firm an exclusive right to provide a good or service to a market.
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Patents
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A government granted monopoly on the production and sale of an invention granted to the inventor. Most patents are for 20 years. Many pharmaceuticals are 7 years. Patents are incentive to create and innovations and are payback for research and development costs
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Copyrights
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A copyright is a government granted monopoly on the production and sale of a creative work granted to the creator. Most copyrights are for the life of the author plus 70 years.
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License
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A license is a permit issued by the government authorizing a person to conduct a certain type of business. Entry into the market depends upon obtaining a license.
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Trade Restrictions
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These are government imposed limitations on international trade using tariffs and quotas.
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Economies of scale
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exist when, as the scale of production is increased, average costs of production decrease. Huge fixed costs up front…but as production increases total costs drop.
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Natural Monopoly
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When extreme economies of scale exist
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Alcoa
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Early in the century, Alcoa owned or controlled most of the bauxite in the US. Bauxite is the chief ore of commercial grade aluminum.
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Problems with Monopolies
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Rent Seeking” – when people use resources to manipulate public policy in order to redistribute income to themselves from others. Makes firm less responsive to consumer demands. Makes firm less diligent to minimize costs of production. No price discrimination
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Rent Seeking”
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when people use resources to manipulate public policy in order to redistribute income to themselves from others (lobbying, campaign contributions, public relations efforts) Very socially wasteful because it results in a deadweight loss.
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Price Discrimination
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Occurs when a seller charges different prices to different buyers for the same good.
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Firm
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An entity that employs resources to produce goods and services.
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What are Resources
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Labor, land, capital, entrepreneurship.
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Why does most production takes place through firms?
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Efficient and Team Production
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Productivity
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is measured by output per unit of input
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Team Production allows for two advantages
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Specialization of labor and Extensive use of capital
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Efficiency
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producing more at lower cost or using less resources
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Capital
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Produced goods that are used in the production of other goods
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Business Firms
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They are owned by individuals; proprietors, partners, or stockholders. Profits of the firm are given to these “Residual Claimants”
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Non-profit Firms
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Have no Residual Claimants. They exist to perform a service or meet a need of society. Use a mix of volunteers and hired staff
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Sole Proprietorship
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a firm owned by one individual (72% of all firms, 4% of all sales)
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Sole Proprietorship
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a firm owned by one individual – 72% of all firms, 4% of all sales
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Corporation
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an organization owned by stockholders that is considered a legal person, separate from its owners – 18% of all firms, 82% of all sales
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How do Proprietorship and Partnership firms raise financial capital
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Self-Financing and Borrowing
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Borrowing from financial institutions
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taking out a loan from a local bank, investment bank
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Self-financing
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The owners contribute personal assets to the firm
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Issuing additional shares of stock
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giving the opportunity for more owners
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Selling Bonds
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A debt obligation sold in open market operations (loans from bond holders)
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NET WORTH
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assets minus its liabilities
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Market Power
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the ability of a seller or buyer to affect market price
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Perfect Competition
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characterized by many sellers of identical products
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Key Characteristics of Perfect Competition
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Many Sellers, Many Buyers, Identical product, Little market power
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Many sellers
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relatively small compared to the total market (easy to enter and leave)
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Little Market Power
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Seller cannot “set” the price…must take the price given
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Profit Maximization Rule
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a perfect competitor will always produce the quantity of output where marginal revenue equals marginal cost.
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Marginal revenue
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the change in total revenue from selling one additional unit of output.
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MSB
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the value or benefit to society for each unit produced
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MSC
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the cost to society of producing one more unit
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Externalities
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added societal benefits or costs of a product
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Perfect competition has two great coincidental benefits
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Profit maximization goal will benefit both society and firm and encourages individual freedom
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