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150 Cards in this Set

  • Front
  • Back
____ firms can take part in Perfect Competition
Many
____ firms can take part in Monopolistic Competition
Many
____ firms can take part in an Oligopoly
Few
____ firms can take part in a monopoly
One
In Perfect Competition, what types of products are bring sold?
Identical
In Monopolistic Competition, what types of products are being sold?
Differentiated
In Oligopoly, what types of products are being sold
Identical or Differentiated
In Monopoly, what types of products are being sold
Unique
What is the ease of entry level for perfect competition?
High
What is the ease of entry level for monopolistic competition?
High
What is the ease of entry level for Oligopoly?
Low
What is the ease of entry level for Monopoly?
None
Explain what a perfectly competitive market is
A Market that meets the conditions of:
- Many buyers and sellers
- all firms selling identical products
Also sets no barriers to new firms entering the market
What determines the price in a perfectly competitive market?
Prices in perfectly competitive markets are determined by the interaction of demand and supply for the good or service
What is a Price Taker?
A buyer or seller that is unable to affect the market price
Firms in a perfectly competitive market have what kind of demand curve?
Firms in a perfectly competitive market have a horizontal demand curve
Explain Profit
The difference between total revenue (TR) and total cost (TC)
Profit = TR-TC
What is Average Revenue
Total Revenue divided by the quantity of the product sold
What is Marginal Revenue?
Change in total revenue from selling one more unit of a good
MR = (∆TR/∆Q)
What is price equal to for a firm in a perfectly competitive market?
For a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue
How is the Marginal Revenue Curve for a perfectly competitive firm?
The marginal revenue curve for a perfectly competitive firm is the same as its demand curve
Where is the largest profit margin for a firm in a perfectly competitive market?
Largest profit is between the total cost curve and the total revenue curve
How long should a firm produce in a perfectly competitive market?
Firms should Produce until MR = MC
This is the profit-maximizing level of output
How does profit look on a graph?
Profit on the graph is a box with a height equal to price minus ATC (for profit) or ATC minus Price (for loss)
How is it illustrated when a firm is breaking even or operating at a loss?
P>ATC means profit
P=ATC means breaking even
P<ATC means the firm is experiencing a loss
What is a sunk cost?
a cost that has already been paid and cannot be recovered
Explain a firm's supply curve in the short run of a perfectly competitive market
A Perfectly Competitive Firm’s marginal cost curve also is its supply curve
A firm will shut down if the price of a good drops below the average variable cost curve
What is the shutdown point?
The minimum point on the average variable cost curve
Explain the market supply curve in a perfectly competitive industry
Determined by adding up the quantity supplied by each firm in the market at each price
What is economic profit
A firm’s revenues minus all its costs, implicit and explicit
When new firms enter a perfectly competitive market, the supply curve shifts to the ____
Right
Explain Economic Loss
The Situation in which a firm’s total revenue is less than its total cost, including all implicit costs
In the long run, firms will exit an industry if they are unable to cover all their costs
What is Long Run Competitive Equilibrium
The situation in which the entry and exit of firms has resulted in the typical firm breaking even
What is the long run supply curve and explain how a perfectly competitive market influences the supply curve
A Curve that shows the relationship in the long run between market price and the quantity supplied

In the long run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price determined by the minimum point on the typical firm’s average total cost curve
Any industry in which the typical firm’s average costs do not change as the industry expands production will have what kind of supply curve?
Any industry in which the typical firm’s average costs do not change as the industry expands production will have a horizontal long-run supply curve
Industries with upward-sloping long-run supply curves are called what?
Industries with upward-sloping long-run supply curves are called increasing-cost industries
Industries with downward-sloping long-run supply curves are called what?
Industries with downward-sloping long-run supply curves are called decreasing-cost industries
What is productive efficiency?
the situation in which a good or service is produced at the lowest possible cost
In the long run, who benefits from cost reductions in a perfectly competitive market?
In the long run, only the consumer benefits from cost reductions
Explain Allocative Efficiency
A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
How long will firms continue producing in a perfectly competitive market?
Firms will produce a good up to the point where the marginal cost of producing another unit is equal to the marginal benefit consumers receive from consuming that unit
Explain Monopolistic Competition
A Market structure in which barriers to entry are low and many firms compete by selling similar, but not identical products.

faces a downward sloping demand curve

sells more units but must accept lower price
As a result, Marginal revenue is downward sloping
Where does a monopolistically competitive firm maximize profit?
A monopolistically competitive firm maximizes profits at the level of output where marginal revenue equals marginal cost
Price _ MR for a perfectly competitive firm and price _ MR for a monopolistically competitive firm
=, >
Monopolistically Competitive firms only produce when P_MC
>
How does the entry of new firms affect the profits of existing firms
demand shifts to the left and becomes more elastic
What happens when the demand curve is tangent to the average total cost curve for a monopolistically competitive firm?
P=ATC
The firm is breaking even
How does a monopolistically competitive firm make money?
Profit is made by selling differentiated products or producing an existing product at a low cost
Monopolistically Competitive Firms charge a price _______ than marginal cost
greater
Monopolistically Competitive Firms _____ produce at minimum average total cost
do not
Where is profit maximized in Monopolistic Competition?
The profit maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost, and the firm is not at the minimum point of its average total cost curve
How Consumers Benefit from Monopolistic Competition
Firms differentiate their products to appeal to customers
What is Brand Management?
The actions of a firm intended to maintain the differentiation of a product over time
What do firms use Brand Management for?
Firms use this to postpone the time when they will no longer be able to earn economic profits
What is a firm trying to accomplish by advertising their product?
When a firm advertises a product, it is trying to shift the demand curve for the product to the right and make it more inelastic
What is Oligopoly
A market structure in which a small number of interdependent firms compete
Explain the Concentration Ratio
state the fraction of each industry’s sales accounted for by its four largest firms
Ex: A four-firm concentration ration greater than 40% indicates that an industry is an oligopoly
What is a barrier to entry
Anything that keeps new firms from entering an industry in which firms are earning economic profits
What are Economies of Scale?
The situation when a firm’s long-run average costs fall as the firm increases output
The greater the economies of scale of an oligopoly, the _______ the number of firms that will be in the industry
smaller
What are the 3 main barriers to entry in an oligopoly
Economies of scale, ownership of a key input, and government imposed barriers
How long do patents last?
20 Years
What is the game theory
The study of how people make decisions in which attaining their goals depends on their interactions with others

In economics, the study of the decisions of firms in industries where the profit of a firm depend on its interactions with other firms
What are the three characteristics of the game theory
Rules
Strategies
Payoffs
What is a business strategy
Actions that a firm takes to achieve a goal such as maximizing profits
What are payoffs?
The profits a firm takes to achieve a goal such as maximizing profits
What is a payoff matrix?
A table that shows the payoffs that each firm earns from every combination of strategies by the firms
What is collusion?
An agreement among firms to charge the same price or otherwise not to compete
What is a dominant strategy?
A strategy that is the best for a firm, no matter what strategies other firms use
What is a Nash Equilibrium?
A situation in which each firm chooses the best strategy, given the strategies chosen by other firms
What is Cooperative equilibrium?
An equilibrium in a game in which players cooperate to increase their mutual payoff
What is a Noncooperative equilibrium?
An equilibrium in a game in which players do not cooperate but pursue their own self-interest
What is a Prisoner's dilemma?
A game in which pursuing dominant strategies results in noncooperation that leaves everyone worst off
What is price leadership?
A form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change
What is a cartel?
A group of firms that collude by agreeing to restrict output to increase prices and profits
What does the Five Competitive Forces Model determine?
This model determines the level of competition in an industry
What is the five competitive forces model?
The degree of competition among existing firms
The threat from new entrants
Competition from substitute goods
Bargaining power of buyers
Bargaining power of suppliers
What is a Monopoly?
A Firm that is the only seller of a good or service that does not have a close substitute
How is a monopoly determined?
A monopoly is determined by how many close substitutes the industry has
Monopolies have ____ barriers to entry
high
What are the four main reasons for monopoly?
Government prevention
Key control of a resource
Network Externalities
Large Economies of Scale
Heirs can hold a copyright for up to __ years after the creator’s death
70
What is a public franchise?
A government designation that a firm is the only legal provider of a good or service
A Government may sometimes to provide certain services directly to consumers through a ______ __________
Public Enterprise
What is a Network Externality
A situation in which the usefulness of a product increases with the number of consumers who use it
What is a Natural Monopoly?
A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms
Where is a natural monopoly most likely to occur?
most likely to occur in markets where fixed costs are very large relative to variable costs
A monopoly’s demand curve is _______ the demand curve for the product
the same as
In a Monopoly, firms are price ______ not price ______
Firms are price makers not price takers
In a monopoly, As long as the MC is _ than MR, the firm should keep selling
<
A monopoly will produce ____ and charge a ______ price than a perfectly competitive industry producing the same good
less, higher
Monopoly causes a _________ in consumer surplus
Reduction
Monopoly causes a ________ in producer surplus
Increase
Monopoly causes a ____________, which represents a reduction in economic efficiency
Deadweight loss
What is an anti-trust law
Laws aimed at eliminating collusion and promoting competition among firms
What is a horizontal merger?
A Merger between firms in the same industry
Governments’ biggest concern
What is a Vertical Merger?
A merger between firms at different stages of production of a good
What are two factors complicating horizontal mergers?
unclear markets
newly merged firms might be more efficient than the merging firms individually
What are three factors the government considers when approving a merger?
Market Definition
Measure of Concentration in the Market
Merger Standards
What is the Herfindahl-Hirschman Index?
A Measurement of Concentration in the market.
squares the market shares of each firm in the industry and adds up the values of the squares
What Merger Standards does the US Government use?
Postmerger HHI Below 1500 - always allowed
Postmerger HHI between 1500 and 2500 - moderately challenged
Postmerger HHI Above 2500 - always challeged
When Regulated, Monopolies must charge a price _____ to its marginal cost
equal
Explain Total Revenue
Total revenue for a firm is the selling price times the quantity sold
What is total revenue proportional to?
Total revenue is proportional to the amount of output.
What does Average Revenue represent?
Average revenue tells us how much revenue a firm receives for the typical unit sold.
In perfect competition, average revenue equals what?
In perfect competition, average revenue equals the price of the good.
For competitive firms, marginal revenue equals what?
For competitive firms, marginal revenue equals the price of the good.
What is the goal of a competitive firm?
The goal of a competitive firm is to maximize profit
How do competitive firms reach their goal of maximizing profit?
This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
Explain Profit Maximization for the Competitive Firm
Profit maximization occurs at the quantity where marginal revenue equals marginal cost.
What is the difference between a shutdown and an exit
A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions.

Exit refers to a long-run decision to leave the market.
What are the three conditions for a shutdown point?
Shut down if TR < VC
Shut down if TR/Q < VC/Q
Shut down if P < AVC
The portion of the marginal-cost curve that lies above average variable cost is the competitive firm’s _____ ___ ______ _____
short-run supply curve.
When should a firm exit the competitive market?
Exit if TR < TC
Exit if TR/Q < TC/Q
Exit if P < ATC
When should a firm enter a competitive market?
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC
Explain the Competitive Firm’s Long-Run Supply Curve
The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.
Firms will enter or exit the competitive market until when?
Firms will enter or exit the market until profit is driven to zero
In the long run, price equals the _______ of average total cost.
The long-run market supply curve is __________ at this price
Minimum, Horizontal
At the end of the process of entry and exit, firms that remain must be making ____ economic profit.
zero
The process of entry & exit ends only when price and average total cost are driven to________
equality
Explain how zero-profit equilibrium work?
In the zero-profit equilibrium, the firm’s revenue compensates the owners for the time and money they expend to keep the business going.
An increase in demand raises what in the short run?
An increase in demand raises price and quantity in the short run.
What is a marginal firm?
The marginal firm is the firm that would exit the market if the price were any lower.
While a competitive firm is a price _____, a monopoly firm is a price _____
Taker, Maker
A monopolist’s marginal revenue is always ____ ____ the price of its good.
less than
When a monopoly increases the amount it sells, it has two effects on total revenue. What are they?
The output effect—more output is sold, so Q is higher.
The price effect—price falls, so P is lower.
A monopoly maximizes profit by producing the quantity at which what?
A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
How long will a monopolist receive economic profit?
The monopolist will receive economic profits as long as price is greater than average total cost.
In contrast to a competitive firm, the monopoly charges a price _____ the marginal cost.
above
The monopolist produces ____ ____ the socially efficient quantity of output
Less than
What is imperfect competition?
Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.

Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.
What is a duopoly?
A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.
What is a Nash equilibrium?
A Nash equilibrium is a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen.
The oligopoly price is ____ than the monopoly price but ____than the competitive price (which equals marginal cost).
The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).
How does an oligopoly affect the market?
The output effect: Because price is above marginal cost, selling more at the going price raises profits.
The price effect: Raising production lowers the price and the profit per unit on all units sold.
What is Resale Price Maintenance?
Resale price maintenance (or fair trade) occurs when suppliers (like wholesalers) require the retailers that they sell to, to charge customers a specific amount.
What is Predatory Pricing?
Predatory pricing occurs when a large firm begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the market.
What is Tying?
Tying refers to when a firm offers two (or more) of its products together at a single price, rather than separately.
Short-run economic profits encourage new firms to enter the market. How does this effect the market?
Increases the number of products offered.

Reduces demand faced by firms already in the market.

Incumbent firms’ demand curves shift to the left.

Demand for the incumbent firms’ products fall, and their profits decline.
Short-run economic losses encourage firms to exit the market. How does this effect the market?
Decreases the number of products offered.

Increases demand faced by the remaining firms.

Shifts the remaining firms’ demand curves to the right.

Increases the remaining firms’ profits.
What are the two characteristics of Long Run Equilibrium?
As in a monopoly, price exceeds marginal cost.

As in a competitive market, price equals average total cost.
There are two noteworthy differences between monopolistic and perfect competition. What are they?
There are two noteworthy differences between monopolistic and perfect competition—excess capacity and markup.
There __ excess capacity in perfect competition in the long run.
There is no excess capacity in perfect competition in the long run.
Free entry results in competitive firms producing at the point where average total cost is minimized, which is the _________ _____ of the firm
Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm
There ___ excess capacity in monopolistic competition in the long run
is
In monopolistic competition, output is ____ than the efficient scale of perfect competition
less
For a competitive firm, price equals marginal cost.
For a monopolistically competitive firm, price is ___ than marginal cost.
greater
Externalities of entry in a monopolistically competitive market include
product-variety externalities.
business-stealing externalities.
The product-variety externality: Because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a ________ externality on consumers.
positive
The business-stealing externality: Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a ________ externality on existing firms.
negative