Principles Of Microeconomics Exam 3

Front 1

4 types of market structure

(& classified by?)

Back 1

BASED ON:
a) number of producers
b) whether the goods are identical or differentiated


1)monopoly

2)oligopoly

3)monopolistic competition

4)perfect competition

Front 2

differentiated goods

Back 2

goods that are different but considered substitutable

*coke & pepsi*

Front 3

monopoly

Back 3

single producer sells single undifferentiated product

*monopolies move up the demand curve, lowering Q & increasing P more than it would be under perfect competition*

Front 4

oligopoly

Back 4

few producers [more than 1 but not large #]
sell products that may be identical or differentiated

Front 5

monopolistic competition

Back 5

many producers each sell differentiated product

*producers of economics text books*

Front 6

perfect competition

Back 6

many producers each sell identical product

Front 7

market power

Back 7

ability of monopoly to raise price above competitive level by reducing output

*easily increases profit*

(oligopolists have market power as well)

Front 8

barrier to entry

Back 8

must exist for a monopoly to persist. keeps others from going into the business

FOUR TYPES of barriers:
1)control of scarce resources / inputs
2)economies of scale
3)technological superiority
[typically short run]
4)gov't created barriers
[patents / copyrights

Front 9

ECONOMIES OF SCALE


as a barrier to entry

Back 9

when avg total cost always falls as output increases

then firms grow larger... larger companies more profitable driving out smaller ones

*fixed cost in providing gas lines to towns ... only large companies can do it*

--Creates a "natural monopoly"

Front 10

natural monopoly

Back 10

monopoly created and sustained by economies of scale

(source is when large fixed costs are required)


-when price is greater than atc, ATC curve declines

Front 11

monopolist demand curve

Back 11

still, MR = MC at profit maximizing quantity

BUT for perfectly competitive firms (price takers) each firm faces horizontal perfectly elastic demand curve (even tho market curve is downward sloping)... cannot change price but can sell as much wanted at given price

MONOPOLIES face downward sloping demand curve bc their demand curve IS the market curve

MONOPOLIES still find MR = MC
bc increasing production has 2 opposing effects on revenue:
1)QUANTITY EFFECT:
[one more unit sold increasing TR by price at which unit's sold]
2)PRICE EFFECT:
[IN ORDER TO SELL THE LAST UNIT MONOPOLIST MUST CUT MARKET PRICE ON all UNITS SOLD... decreasing TR

*monopolies MR curve is always less than the demand curve bc of the PRICE EFFECT*
[monopoly's MR from selling addition unit always less than price monopolist receives for unit]
...unlike perfectly comp firms which MR & MP always equal

Front 12

Quantity Effect & Price Effect
in MONOPOLIES

Back 12

-at low output levels, Quantity Effect greater than price effect
[as monopolist sells more has to lower price on only few units so price effect is small]

-high levels of output price effect stronger than quantity effect
[as monopolist sells more now has to lower price on many units of output making Price Effect very large]

Front 13

monopolies maximizing profit

Back 13

if MR > MC then increases profit by producing more

if MR < MC then increasing profit by producing less

**MR = MC**

-monopolists take price effect into account

Front 14

monoplies are a source of inefficiency

Back 14

the losses to consumers are larger than gains to monopolist... leads to net losses for the economy
*which is why gov't's try to regulate them.

Front 15

"public ownership"

Back 15

the good being monopolized is supplied by the government

solves answer to problem of natural monopoly

-can set prices based on criteria of efficiency, rather than profit maximization.

Front 16

"price regulation"

Back 16

limits the price that a monopolist is allowed to charge

-comman answer to natural monopolies in the US

Front 17

single-price monopolist

Back 17

one that charges all consumers the same price

(as opposed to price discrimination)

Front 18

price discrimination

Back 18

most monopolies can increase profits by charging different customers different prices for the same good

Front 19

perfect price discrimination

Back 19

takes place when monoplist charges each consumer the max they're willing to pay

Front 20

oligopolist

Back 20

a firm in an an industry thats part of an oligopoly


(only a few sellers of both identical and differential products)

*have market power as well... aren't price takers**

-not necessarily large firms but few competitors

Front 21

imperfect competition

Back 21

when firms compete but also possess market power (enabling them to affect market prices)

1)oligopoly
2)monopolistic competition

Front 22

most important source of oligopolies?

Back 22

economies of sale

-giving larger producers cost advantage over smaller one

Front 23

"4-firm concentration ratio"

Back 23

what share of industry sales is accounted for by the top 4 firms?

*used to get a picture of market structure & also to determine oligopolies*

Front 24

duopoly

Back 24

oligopoly when there are only 2 producing firms

(each known as a duopolist)

Front 25

collusion

Back 25

when duopolists cooperate to raise eachothers profits

*strongest form = cartel*

Front 26

cartel

Back 26

arrangement that determines how much each firm is allowed to produce

*type of collusion*

(among gov'ts rather than firms)

-problem = both firms would have incentive to cheat... lowering TR of firms combined, but raising the TR of the cheater... but if both cheated, both firm's TR's would fall

Front 27

producing an additional unit of good (MR) has 2 effects:

Back 27

1)quantity effect:
one more unit sold increases TR by the price its sold at

2)price effect:
to sell one more unit the monopolist must cut the market price on ALL units sold (BUT oligopolists only concerned w/how price effect effects their business.. .not the whole market)
---an oligopolist faces a smaller price effect than a monopolist... it always seeems profitable to increase production
*but if everyone thinks this way everyone's profit will be lowered

Front 28

noncooperative behavior

Back 28

when firms ignore the effects of their actions on eachother's profits

(an oligopoly going against an agreement)

Front 29

interdependence

Back 29

when decisions of 2+ firms significantly affect each other's profits

(like oligopolies)

Front 30

game theory

Back 30

the study of behavior in situations of interdependence

*deals with situations in which the reward to a player (payoff) depends on actions of other players*

Front 31

pay-off

Back 31

the reward received by a player in a game

(like profit earned by oligopolist)

Front 32

payoff matrix

Back 32

shows how the payoff to each of the participants in 2 player game depend on the actions of both

*helps analyze interdependence*

contains 4 boxes showing the profits of each firm for different Q's.
---both firms better off if they both choose the lower output; but in each ind. firm's interest to choose the higher output {Prisoner's Dilemma!}

Front 33

"Prisoner's Dilemma"

Back 33

game in which the payoff matrix implies:

1)each player has incentive (regardless of other player) to cheat and take action benefitting themselves at other firm's expense

2)when both players cheat, both are worse off than they would have been if neither had cheated.

Front 34

dominant strategy

Back 34

when it is the player's best action regardless of what action the other player takes

Front 35

Nash Equilibrium

AKA

Noncooperative Equilibrium

Back 35

thet result when each player chooses the action that maximizes their payoff
given the actions of the other players
ignoring the effects of their own action on the payoffs of the other players.

Front 36

strategic behavior

Back 36

taking account the effects of the action they choose today on the future actions of other players in the game

*1 type = "tit for tat"*

Front 37

"tit for tat"

Back 37

start off behaving cooperatively then do whatever the other player did in the previous period

*form of strategic behavior*

"if you behave cooperatively, so will i... if you cheat i wont be nice in the future."

Front 38

tacit collusion

Back 38

when firm slimit production then raise prices in a way that raises each others' profits... even though they haven't made a formal agreement

*when oligopolists expect to compete over an extended period of time each firm will often conclude its in their own best interest to be helpful to the other firms*

-results in a kinked demand curve

Front 39

kinked demand curve

Back 39

occurs when an oligopolist thinks they'll lose a great number of sales if they reduce output & increases price..... and will only gain a few sales if output is increased & price is lowered (away from tacti collusion outcome)

-kinked @ P & Q combo associated w/ tacit conclusion outcome
-demand curve flat at output less than Q* == if output below Q* does'nt expect rivals to reduce output as well --> loss of many sales
-demand curve sloped steeply downward at output greater than Q* === if produce more than Q* then rivals will also produce more and cut prices -->gain fewer sales

Front 40

MC & MR curves
in context of a
Kinked Demand Curve

Back 40

a portion of the MR curve is vertical (a break in the curve) (@ tacit collusion outcome pt)
--->2 MC curves pass thru the break in the MR curve... one responding to higher MC & one responding to lower MC

--->any MC curve in the break generates the same output level (Q*) [output's unresponsive to MC change in this range]


-if MC falls below break zone = faces break in collusion and increasing output
-if MC raises above break zone = faces breakdown in collusion & reducing output, raising price
-if MC changes w/i break producer leaves output unchanged rather than risking breakdown in collusion

***all when MC is beleived to be faced by that single producer***

Front 41

anti-trust policy

Back 41

efforts of the go't to prevent oligopoly industries from behaving like monopolies

Front 42

Factors preventing
oligopolies (w/ tacit conclusions)
to push prices up to monopoly level

Back 42

1)Large #s:
-the more firms in an oligopoly the less incentive of 1 firm to be cooperative
(low barriers to entry)

2)Complex Products & Pricing Schemes
-oligopolists usually sell many different products -- keeping track of them all makes it hard to see if firm is cheating on a tacit agreement

3)Differences In Interest
-differing perceptions about what is fair / in their best interest

4) Bargaining Power of Buyers:
-often oligopolists sell to large buyers, not ind consumers
--->have more bargaining power than an ind consumer would

Front 43

"price war"

Back 43

occurs when tacit collusion breaks down & prices collapse

-sellers try to put eachother out of business
-oligopolies charge pricces well below what a single giant firm would

Front 44

"product differentiation"

Back 44

firms make efforts to create perception that their product is different

-adding extras
-different designs

Front 45

"price leadership"

Back 45

one firm sets price first then other firms follow

Front 46

"non-price competition"

Back 46

firms that have a tacit agreement to not compete on price
engage in this

-adding new features to products
-large sums on ads

Front 47

monopolistic competition

Back 47

3 CONDITIONS:
1)many competing producers
*many food court vendors

2)differentiated products
-distinct products
*cheap chinese, fast food burgers*

3)free entry / exit in the long run
*other fast food joints can join the food court if beleive it'll be profitable


-each producer has ability to set price... but is limited as to how high it can be set

-collusion doesn't exist

*restaurants* *gas stations*

Front 48

product differentiation

in

monopolistic competition

Back 48

-bc tacit collusion is impossible w/ so many producers
--->product differentiation only way monolistically competitive firms can gain market power

3 FORMS:
1)different style / type
-products are IMPERFECT substitues
*some will choose a more expensive meal if closer to their preferences

2)different location
-many choose closest seller, not cheapest (convenience)
*gas station more convenient near home or work

3)different quality
-consumers vary in what they're willing to pay for higher quality
*gourmet chocolate

Front 49

Short-run Equilibrium

of

Monopolistic Competition

Back 49

-# of firms taken as given

-to max profits MR = MC
-if at any Q of output ATC curve lies above the demand curve then there is NO WAY of firm to make a profit

-Profitability depends on relationship between demand curve & ATC curve


(Gen. traits on monopolistic comp graphs.. both short & long term)
-downward sloping demand curve & MR curve
-upward sloping MC curve
-[some fixed costs:] ATC is U-shaped

Front 50

Long-Run Equilibrium

of

Monopolistic Competition

Back 50

-reached only after enough time elapsed for firms to enter / exit the industry

-not in long run equilibrium til persistent losses eliminated by exit of some firms

-ENTRY of producer shifts demand & MR curve LEFT
-EXIT of producer shifts demand & MR curve RIGHT

-long run equilibrium when all firms earn 0 profit
("zero-profit equilibrium")

"monopolists w/o monopoly profits"

Front 51

"Zero-Profit Equilibrium"

Back 51

occurs in the long-run of a monopolistically competitive industry

-firms just manage to cover costs @ profit maximizing output Q's

-demand curve must be TANGENT to ATC curve
AT the profit maximizing Q (where MC = MR)


-PROFIT = new firms enter shifting demand curve of all existing firms left until profits are eliminated

-LOSS = existing firms exit & demand curve shifts right until all losses eliminated

Front 52

Monopolistic Competition

vs

Perfect Competition

[price, MC, & ATC]

Back 52

MONOPOLISTIC COMPETITION:
1)price is higher than firm's MC
*want to sell more at going price*

2)Q firm produces is on downward sloping part of ATC (u)
---fails to produce enough to minimize ATC
{aka "excess capacity"



PERFECT COMPETITION:
1)price received by firm = firm's MC @ that output
*don't care if they sell to you at going price (wheat)*

2)prodcue at bottom of ATC (u)
--firm produces Q that ATC is minimized at

Front 53

"Excess Capacity"

Back 53

firms in monopolistically competitive industries produce less than the output where ATC is minimized

Front 54

when is advertising worthwhile?

Back 54

only in industries where firms have some market power

--get more people to buy seller's product @ the going price

Front 55

"brand names"

Back 55

a name owned by a particular firm distinguishing its product from those of other firms

Front 56

what competitors charge a price above MC

Back 56

-monopolist competitors

-monopolies

Front 57

marginal social COST of pollution

Back 57

additional cost imposed on society as a whole by an additional unit of pollution

Front 58

marginal social BENEFIT of pollution

Back 58

additional gain to society from an additional unit of pollution

Front 59

socially optinmal quantity of pollution

Back 59

quanity of pollution society would choose if all costs and benefits were fully acccounted for

(upward sloping marginal social cost curve --- shows how marginal cost of addition unit of pollution varies w/quantity of emissions

marginal social benefit curve[MSB downward sloping bc progressively harder (& more expensive to achieve further reduction in pollution as amt falls]

-market by itself wont arive at socially optimal quantity of pollution

Front 60

external costs

AKA

negative externalities

Back 60

uncompensated cost that an ind or firm imposes on others

-most important = environmental costs

*choosing to drive during rush hr increases congestion & travel time of other drivers

Front 61

external benefits

AKA

positive externalities

Back 61

benefits an ind or firm confers on others w/o receiving compensation

Front 62

externalities

Back 62

external costs & benefits

Front 63

Coase Theorem

Back 63

in the presence of externalities an economy can always reach an efficient solution as long as cost to individuals making deal are low (transaction costs)

*externalities need not lead to inefficiency bc ind's have incentive to make mutually beneficial deals

Front 64

transaction costs

Back 64

the costs to individuals making a deal

Front 65

"internalize the externality"

Back 65

when ind's do take externalities into account when making decisions

*if externalities fully internalized outcome is efficient w/o gov't intervention*

Front 66

Transaction Costs

preventing ind's from making efficient deals

Back 66

1)cost of communication
-high is many ppl involved

2)costs of making legally binding agreement
-lawyers may be required

3)costly delays involved in bargaining
-both sides may hold out to try for more favorable terms
(increased effort, forgone utility)

Front 67

"environmental standards"

Back 67

rules protecting the enviro by specifying actions by producers & consumers

*rules making communities treat sewage*

Front 68

emissions tax

Back 68

tax that depends on the amt of pollution a firm produces

Front 69

pigouvian taxes

Back 69

tazxes designed to reduce external costs

Front 70

tradable emissions permits

Back 70

licenses to emit limited Q's of pollutants that can be bought & sold by polluters

Front 71

marginal social cost of a good or activity

Back 71

equal to MC of productoin + marginal external cost

Front 72

technology spillover

Back 72

external benfit results when knowledge spreads among ind's & firms

Front 73

marginal social benefit of good / activity

Back 73

marginal benefit to consumers + marginal external benefit

Front 74

pigouvian subsidy

Back 74

payment designed to encourage activities that yeild external benefits

Front 75

industrial policy

Back 75

policy that supports industries believed to yield positive externalities

Front 76

"private good"

Back 76

when a good is
1)excludable

2)rival in consumption


*wheat

Front 77

excludable

Back 77

suppliers of the good can prevent people who don't pay from consuming it

Front 78

"rival in consumption"

Back 78

the smae unit of the good cannot be consumed by more than one person at the same time

Front 79

nonexcludable

Back 79

the supplier can't prevent consumption of the good by people who didn't pay for it

*fire protection
*city of london improved the Great Stink

Front 80

"nonrival in consumption"

Back 80

more than one person can consum the same unit of the good at the same time

*TV show

Front 81

Four Types of Goods:

Back 81

1)PRIVATE GOODS:
-excludable & rival in consumption
*wheat

2)PUBLIC GOODS:
-nonexcludable & non rival in consumption
*public sewer system

3)COMMON RESOURCES
-nonexcludable
-rival in consumption
*clean water in a river

4)ARTIFICIALLY SCARCE GOODS:
-excludable
-nonrival in consumption
*payperview movies on TV

Front 82

Free-Rider Problem

Back 82

if a good is nonexcludable rational consumers won't be willing to pay for it
--no incentive to pay for their own consumption

--->RESULT: non-excludable goods suffer from inefficiently low production in a market economy

Front 83

Private goods are the only goods that can be efficiently produced & consumed in a competitive market

Back 83

they're excludable::
--producers can charge for them & therefor have an incentive to produce them

they're rival in consumption::
---its efficient for consumers to pay a + price (price = MC of production)

Front 84

Public GOods

Back 84

-nonexcludable & nonrival in consumption

*disease prevention
*nat'l defense
*scientific research

Front 85

cost-benefit analysis

Back 85

gov'ts estimate the social costs & benefits of providing a public goodq

Front 86

common resource

Back 86

good that is nonexcludable but is rival in consumption

*you can't stop me from consuming the good & more consumption by me means less of the good available to u

*stock of fish in limited area

-bc nonexcludable, ind's can't be charged for their use
-bc rival in consumption, use depletes resource making it unavailable to others
====>Subject to OVERUSE

*marginal social cost of my use is higher than my individual marginal cost

Front 87

overuse

Back 87

individuals ignore the fact that their use depletes the amt of resource remaining for others

-common resources suffer

Front 88

3 ways to induce people to internalize the costs imposed on others by using COMMON RESOURCES

Back 88

1)tax or otherwise regulate
-can impose a pigouvian tax

2)create tradable license system for right to use common resource

3)make excludable & assign property rights to some individuals

Front 89

Artificially Scarce Good

Back 89

-excludable
-nonrival in competition
*payperview movies

-producers can charge for consumption
-MC of ind's consumption is 0

**the price the supplier charges exceeds MC**
---consumption inefficiently low
**ATC is above MC (price is above MC)