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33 Cards in this Set
- Front
- Back
5 Assumptions
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1) Perfect Competition
2) Perfect Information 3) Well-behaved preferences 4) No externalities 5) No public goods |
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Which of the 5 assumptions are relaxed?
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1) Perfect Competition
2) Perfect Information 3) Well-behaved preferences 4) No externalities |
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If demand is perfectly elastic, how is the D curve graphed?
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With a horizontal line
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Under monopolistic competition MC=?
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MR = MC
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Under perfect competition MC = ?
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MC = P (= MR)
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Negatives of Monopolies
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1) Deadweight loss
2) Moral hazard, too big to fail 3) Rent seeking |
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Rent seeking
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When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.
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Supernormal profits
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Supernormal profit, also referred to as abnormal profit, pure profit, excess profit or economic rent is an economic term of profit exceeding the normal profit.
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Positives of Monopolies
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1) Natural monopolies (only one firm paying high fixed costs)
2) Increased efficiency 3) Mergers can internalize externalities |
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Rule of Thumb (for monopoly pricing)
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P = MC / (1 + (1+ Elasticity of Demand))
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Ad valorem tax's effect on P
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P = MC + t / (1+ (1/Elasticity of Demand))
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How to increase Pricing Power:
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1) Limit # of firms (barriers to entry)
2) Make demand more inelastic (branding, advertising, etc.) 3) Strategic interaction (collusion) |
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How can firms "grab" consumer surplus?
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1st Degree: Bargaining/Price Discrimination
2nd Degree: Quantity and Block pricing (bleachers vs. front row) 3rd Degree: Market Segmentation |
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Market Segmentation
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Men vs. women, old vs. young, student and senior discounts
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Oligopoly
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A situation in which a particular market is controlled by a small group of firms.
An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market. |
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Cournot Model
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An economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time.
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Stackelberg
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a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially
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Game Theory, Dominant Strategy
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Optimal strategy, regardless of what the other person will do
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Nash Equilibrium
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A concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy after considering an opponent's choice. Overall, an individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. A game may have multiple Nash equilibria or none at all.
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When is collusion more likely? (In game theory)
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in a repeating game
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Separating Equilibrium
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Group A signals, B does not
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Non-rivalrous
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No marginal cost for additional users (cable)
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Non-excludeable
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Cannot prevent free-riding (the commons)
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Rivalrous and excludable
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consumer goods
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Rivalrous and non-excludable
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common resources
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Non-rivalrous and excludable
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cable TV education
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Non-rivalrous and non-excludable
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public goods
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Marginal Social Cost
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The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders.
MSC = MC + MEC |
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Marginal External Cost / Negative externalities
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the adverse effects of commerce borne by those outside the activities of production and consumption and for which there is no recompense; e.g., the noise levels endured by residents near an airport.
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What happens to deadweight loss when there are externalities?
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There is no deadweight loss when there are externalities.
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When a tax is levied on a monopoly-produced good...
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The price increase can be more than the amount of the tax
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Which line is always steeper? The MR curve or the Demand curve?
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The MR curve is always steeper than the demand curve
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Monopsony
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A market similar to a monopoly except that a large buyer not seller controls a large proportion of the market and drives the prices down.
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