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103 Cards in this Set
- Front
- Back
scarcity
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the good available are too few to satisfy individual's desires
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productive efficiencies
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producing as much output as possible with fixed inputs
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allocative efficiency
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produce combination of outputs with highest value
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distributive efficiency
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good are given to those who value them most
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opportunity cost
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the value of the next best alternative to producing a good
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marginal analysis
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consumer stops consuming when MB=MC
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Production Possibility Curve (PPC)
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relationship of outputs produced with resources available, given: full and efficient use, fixed resources, specific technology
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Law of Comparative Advantage
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largest gain is had when specialization (producers produce product w/ lowest OP) and trading are utilized
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Law Of Demand
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all else equal, quantity demanded is inversely related to price
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Responsiveness of Demand to a Price Change
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The greater the quantity demanded changes and the flatter the demand curve: the higher the responsiveness
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Factors that shift demand curve
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income, price of substitute, price of complement, expectations, demographic, taste
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Normal Good
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Good that when income increases, demand increases
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Inferior Good
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Good that when income increases demand decreases
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Law of Supply
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All else equal, quantity supplied is directly related to price
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Factors that shift supply curve
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technology, price of input, price expectations, number of firms/producers
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Price Support (Floor)
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Price set by government that is higher than the natural market value. Often creates a surplus which is bought back by govt. with tax payer's money aka income redistribution
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Price Control (Ceiling)
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Price that is set below the natural market value that often creates a shortage.
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Own Price Elasticity of Demand
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%change in Qdemanded for 1% change in price: =%change Qd/%changeP
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Arc Price
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Elasticity between two points on a demand curve
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Elatic
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e>1
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Inelastic
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e<1
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Perfectly Inelastic
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e=0, no response to change in price, creates a vertical demand curve
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Cross-Price Elasticity
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% change in Qd for one product with 1% change in price of another product. Positive e = substitue. Negative e = complement
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Income Elasticity
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% change in Qd for 1% change in income. Normal good = positive. Inferior good= negative. Luxury > 1. Nessecity less than 1 but greater than 0
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Unit elastic
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e=1
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Revenue with Elastic Demand
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Price up, Quantity down - Revenue Down. Price and revenue move in opposite directions
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Revenue with Inelastic Demand
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Price up, Quantity down - Revenue up.
price and revenue move in same direction. |
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Revenue with Unit Elasticity
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Price up, Quantity down - Revenue stays the same bc of the 1 to 1 ratio
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Perfectly Elastic
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horizontal demand curve, e = infinity. quantity responds enormously to price
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Revenues with Linear Demand
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midpoint of demand curve is where e=1 (unit elastic) to the left of midpoint is elastic, to the right of the midpoint is inelastic. creates an upside-down parabola w/ midpoint at midpoint quantity
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Factors that effect elasticity
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number and ease of obtaining substitutes. Factors that affect # of substitutes are: time period, degree to how much it is a luxury, market definition and importance of the good in one's budget
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Consumer Surplus
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Amount of value a consumer recieves from purchasing a good lower than its value. area above the market price and below the demand curve. TWP - Actual Payment
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Producer Surplus
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Dollar measure of a producer's benefit form participating in a transaction. Amount received - WTA. Area above the supply curve, under the market price.
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Tax on Producers
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Causes the Supply curve to shift to the right. Space between curves is equal to the tax. Elasticity determines who will receive more burden: less elastic - more burden
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Passing on the Tax Burden
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Consumers receive entire tax is demand curve is vertical aka perfectly inelastic. Also if supply curve is perfectly elastic (horizontal supply curve)
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Tax on Consumers
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Demand curve is shifted downward to reflect a pseudo demand curve representing the tax as a decrease in income. Quantity is determinded by new equil., price is determinded by that quantity on old demand curve. Producers get P2-tax, so orig. market price
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Effect of Price Ceiling on Surplus
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Consumer surplus = area under demand curve, above price, to the quantity suppliers are willing to supply.
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Per Unit Tax on Producers
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Causes supply curve to shift the the left: space between S curves is tax: Consumers Pay new equil. price, producers get P1-P0 so CS is above P1 below D curve, PS is below P0 above Orig. S curve. Rectangle in between is deadweight loss
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Short Run
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Period of time in which the amount of at least one input is fixed in the production process and firms cannot enter or exit a market
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Long Run
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long enough for a producer to adjust all input uses and firms can enter and exit
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Horizontal Integration
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Firms operating at different sites but producing the same thing w/ similar methods
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Vertical Integration
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firms operate on different production levels w/in an industry e.g oil company owning gas stations
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Proprietorship
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owned by one person
advantage: profit taxed only once, easy to organize, simple decision making disadvantage: unlimited liability, limited financial resources, no specialization |
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Partnership
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owned by 2 or more people
advantage: easily organized, specialization possible, increased financial resources, profits taxed as personal income only disadvantage: unlimited liability, limited financial resources, could be disagreement |
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Corporation
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legal entity distinct from its individual owners. organization that acts as "legal person"
advantage: easier to raise money (stock), limited liability, mass production possible, life span is independent of owners disadvantages: complex management, corporation profit and personal income taxed, owner and control are separate |
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Business Goal
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economic profit = total revenue - total cost
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Explicit Cost
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costs of production: wages, rent, resources, etc
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Implicit Cost
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Opportunity Cost!
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Production Function
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relationship of input and max output that each input combination can produce. Labor + Capital
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Total Product
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total quantity produced. TP curve shows max output given variations in variable input (L in SR)
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Average Product of Labor
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average amount produced by one unit of reliable input given a fixed amount of some fixed input aka productivity APL=TP/L
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Marginal Productive of Labor
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additional output resulting from adding oneunit of variable input, given a fixed amount of some fixed input. MPL= change in TP/ change in L
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Product Curves
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When AP=MP, AP will be at its highest.
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SR Law of Diminishing Returns
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as a firm uses more of a variable input with the presence of a fixed input, its marginal product will eventually diminish
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SR TFC
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costs that do not vary w/ output level, i.e costs of fixed input
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SR TVC
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cost that varies with output level i.e labor
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SR TC
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TFC +TVC
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Average Fixed Cost
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average amount of fixed cost to make 1 output. TFC/TP
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Average Variable Cost
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average amount of variable cost needed to make 1 output unit TVC/TP
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Average Total Cost
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average cost of producing one unit. TC/TP = (TVC+TFC)/TP = AFV + AVC
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Marginal Cost
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additional cost of additional output. change in TC/ change in TP
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Relationship of AVC + APL
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AVC = wages/APL thus AVC and APL are inversely related
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Relationship of MC and MP
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MC = wages/MP thus MC and MP are inversely related
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Relationship of MPL and APL
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MPL and APL are directly related, Intersect at max of APL. When MP @ highest - MC @ lowest. When AP @ highest - AVC @ lowest. MC and AVC intersect at AVC lowest pt.
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Principle of Equal Marginal Productivities per dollar
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economically efficient production is achieved when MPL/w = MPk/r. r=interest
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Relationship between LR and SR costs
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LR ATC curve is the sum of all SR ATC curves
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Constant Returns to Scale
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double all inputs - outputs will be doubled. MC and ATC will be fixed.
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Increasing Returns to Scale/ Economics of Scale
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double all input - more than double output. MC and ATC decrease
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Decreasing Returns to Scale/ dis economics to scale
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Double all input- less than double output. MC and ATC increase
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Factors that cause cost curves to shit in LR
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price of inputs
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Conditions of Perfect Competition
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buyers & sellers are price takers
# of firms is large no barriers to entry identical products complete information selling firms are profit maximizing |
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Perfect Competition MR
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MR = Market Price
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Demand Faced by Perfectly Competitive Firms
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Individual firm's demand curve is horizontal, price is determined by market demand. Market demand is downward sloping
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Economic Profit
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occurs when point where MC=MR is above the ATC curve
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Zero Economic Profit
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Occurs when the point where MC=MR is tangent to the ATC curve
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Econimic Loss
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occurs when point where MC=MR is below ATC curve
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Shut Down Point in SR
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P< min AVC then shut down bc not enough profit to cover labor costs. Produce so long as the fixed costs are covered.
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Perfectly Competitive Firm's Supply Curve in the SR
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section of the firm's MC curve above the minimum AVC (shut down point)
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Constant Cost Industry
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Input prices remain constant as output increases. results in horizontal LR supply curve
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Increasing Cost Industry
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input prices increase as output increases. results in upward sloping LP supply curve
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Decreasing Cost Industry
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input prices decrease as output increases. results in downward sloping LP supply curve. ex. computer chips.
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Creation of Monopolies
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extreme barrier to entry. natural ability: unique ability to produce a good more efficiently than all other firms. Economics of scale: one firm can produce at a lower cost than two more more firms can. Government created monoploies
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Demand Curve faced by Monopolies
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Demand curve is average revenue curve and is downward sloping.
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Four Defects of Monopoly
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monopolies are inconsistent with freedom, the distributional effects of monopolies are unfair, monopolies encourage people to waste time and money trying to get monopolies, there is a welfare loss to society
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First Degree Price Discrimination
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Firm charges each consumer their max. willingness to pay for each unit. MR is D curve. Consumer surplus goes to zero bc price is lower, quantity is higher. MC=P at profit max. output thus resource allocation is effictient
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Second Degree Price Discrimination
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sell different amounts at different price e.g bulk. Consumer surplus is decreased.
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Third Degree Price Discrimination
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Charge different people different price e.g student discount. The market that has inelastic demand will pay higher price. Requires market power, segregation and no resale.
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Price Regulatoin
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set by govt. to control price. Socially Optimal Price - P=MC. Fair Return Price - P=ATC so monopoly had zero economic profit.
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Characteristics of Monopolistic Competition
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many sellers, differentiated product, low barrier to entry.
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Demand Curve of MonoComp
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will not face the entire market demand curve but has some control over price bc they are the sole producer of the product.
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Profit Max. Output for MonoComp
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MR=MC
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Profit for MonoComp
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May be positive in SR is price is higher than ATC, in LR profit is competed away
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Characteristics of oligopoly
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small # of large firms, interdependence among firms
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Measure of Market Concentration
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Total sales of 4 largest firms in an industry as a percentage of the total sales of the industry. Add 4 firms sale, divide by total sales of industry
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Collusion
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Agreement among firms to avoid certain competitive practices. Cartel: an organization of sellers designed to coordinate supply decisions to maximize profits.
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Obstacles to Collusion
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Legal obstacles, the larger number of firms the harder it is to collude, secret price cuts and over producing, low barriers to entry for market
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Price and Output of Oligopoly
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Price charged will be lower than monopolist but higher than competitive. Strong incentive to cheat on agreements so price and quantity will even out
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Sherman Antitrust Act
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1890- law designed to regulate the competitive process by making monopolizing and restraint of trade illegal
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Clayton Act
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1914 - Law that made four specific monopolistic practices illegal: price discrimination, tie in contracts, interlocking directorships, buying stock in competitor's company to reduce competition
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Horizontal Merger
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to combining of two companies in the same industry.
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Vertical Merger
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a combination of two companies that are involved in different phases of producing a product
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Federal Trade Commission Act
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1914 - law that made it illegal for firms to use "unfair methods of competition" and to engage in "unfair or deceptive acts or practices"
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Robinson-Patman Act
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1936 - made it illegal for many firms to lower prices
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