Term
|
Definition
| we assume this is to maximize profit |
|
|
Term
|
Definition
| Profit = Total revenue – Total cost |
|
|
Term
|
Definition
| the amount a firm receives from the sale of its output |
|
|
Term
|
Definition
| the market value of the inputs a firm uses in production |
|
|
Term
|
Definition
| require an outlay of money, e.g., paying wages to workers |
|
|
Term
|
Definition
| do not require a cash outlay, e.g., the opportunity cost of the owner’s time |
|
|
Term
|
Definition
| total revenue minus total explicit costs |
|
|
Term
|
Definition
| total revenue minus total costs (including explicit and implicit costs) |
|
|
Term
| why accounting profit is higher than economic profit |
|
Definition
| because it ignores implicit costs |
|
|
Term
|
Definition
-shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good
-It can be represented by a table, equation, or graph |
|
|
Term
|
Definition
| The marginal product of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant. |
|
|
Term
| equation for Marginal product of labor (MPL) |
|
Definition
Marginal product of labor (MPL)=(∆Q/∆L)
∆Q = change in output, ∆L = change in labor |
|
|
Term
| Diminishing marginal product |
|
Definition
| The marginal product of an input declines as the quantity of the input increases (other things equal). |
|
|
Term
|
Definition
| the increase in Total Cost from producing one more unit |
|
|
Term
| equation for marginal cost (MC) |
|
Definition
MC=(∆TC/∆Q)
TC= total cost and Q= quantity |
|
|
Term
|
Definition
| do not vary with the quantity of output produced. |
|
|
Term
|
Definition
| vary with the quantity produced. |
|
|
Term
| equation for Total cost (TC) |
|
Definition
TC = FC + VC
TC= total cost, FC= fixed cost, VC= variable cost |
|
|
Term
|
Definition
equals total cost divided by the quantity of output: ATC = TC/Q
Also, ATC = AFC + AVC |
|
|
Term
| Why ATC Is Usually U-Shaped |
|
Definition
As Q rises:
Initially, falling AFC pulls ATC down.
Eventually, rising AVC pulls ATC up. |
|
|
Term
|
Definition
| The quantity that minimizes ATC. |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
| where the MC curve and the ATC curve cross |
|
Definition
| at the ATC curve’s minimum |
|
|
Term
|
Definition
| Some inputs are fixed (e.g., factories, land). The costs of these inputs are FC. |
|
|
Term
|
Definition
| All inputs are variable (e.g., firms can build more factories or sell existing ones). |
|
|
Term
| In the long run, ATC at any Q is... |
|
Definition
| cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC). |
|
|
Term
| long run ATC (LRATC) as it relates to factory size |
|
Definition
|
|
Term
| the composition of a typical LRATC curve |
|
Definition
the combined effect of many SRATC's, as demonstrated here
[image] |
|
|
Term
|
Definition
-ATC falls as Q increases
-occur when increasing production allows greater specialization
-more common when Q is low |
|
|
Term
| Constant returns to scale |
|
Definition
| ATC stays the same as Q increases |
|
|
Term
|
Definition
-ATC rises as Q increases
-these are due to coordination problems in large organizations
-More common when Q is high |
|
|
Term
| marginal product of labor |
|
Definition
| the increase in output from a one-unit increase in labor, holding other inputs constant |
|
|
Term
| Characteristics of Perfect Competition |
|
Definition
1. Many buyers and many sellers.
2. The goods offered for sale are largely the same.
3. Firms can freely enter or exit the market. |
|
|
Term
| why both the buyer and the seller are "price takers" |
|
Definition
1. Many buyers and many sellers.
2. The goods offered for sale are largely the same. |
|
|
Term
| equation for total revenue |
|
Definition
|
|
Term
| equation for average revenue (AR) |
|
Definition
|
|
Term
|
Definition
| The change in TR from selling one more unit |
|
|
Term
| equation for marginal revenue |
|
Definition
|
|
Term
| MR = P is only true for... |
|
Definition
| firms in competitive markets. |
|
|
Term
| If Q increases by one unit, what happens to revenue and cost? |
|
Definition
| revenue rises by MR and cost rises by MC |
|
|
Term
|
Definition
| increase Q to raise profit |
|
|
Term
|
Definition
|
|
Term
| a Firm’s Supply Decision at MC < MR |
|
Definition
| increase Q to raise profit |
|
|
Term
| a Firm’s Supply Decision at MC > MR |
|
Definition
|
|
Term
| a Firm’s Supply Decision at MC = MR |
|
Definition
| Changing Q would lower profit |
|
|
Term
| a competitive firm's profit maximizing Q |
|
Definition
|
|
Term
|
Definition
|
|
Term
| change in price vs. change in profit maximizing quantity |
|
Definition
| when price rises, profit maximizing quantity rises |
|
|
Term
| this determines the firm’s Q at any price |
|
Definition
|
|
Term
| this is a firm's supply curve |
|
Definition
|
|
Term
|
Definition
| A short-run decision not to produce anything because of market conditions |
|
|
Term
|
Definition
| A long-run decision to leave the market |
|
|
Term
| a key difference between shutdown and exit |
|
Definition
-If shut down in SR, must still pay FC.
-If exit in LR, zero costs. |
|
|
Term
| a firm's cost of shutting down |
|
Definition
|
|
Term
| firm's benefit of shutting down |
|
Definition
cost savings = VC (variable costs)
firm still has to pay FC (fixed costs) |
|
|
Term
|
Definition
TR < VC
translates to P < AVC |
|
|
Term
| The firm’s SR supply curve is... |
|
Definition
| the portion of its MC curve above AVC. |
|
|
Term
| what firm does if P > AVC |
|
Definition
|
|
Term
| what firm does if P < AVC |
|
Definition
|
|
Term
|
Definition
| a cost that has already been committed and cannot be recovered |
|
|
Term
| why sunk costs should be irrelevant to decisions |
|
Definition
| you must pay them regardless of your choice |
|
|
Term
|
Definition
|
|
Term
| Cost of exiting the market |
|
Definition
|
|
Term
| Benefit of exiting the market |
|
Definition
cost savings = TC
(zero FC in the long run) |
|
|
Term
|
Definition
TR < TC
translates to P < ATC |
|
|
Term
| a new firm will enter the market if... |
|
Definition
TR > TC
translates to P > ATC |
|
|
Term
| the competitive firm's supply curve |
|
Definition
| the portion of its MC curve above LRATC |
|
|
Term
| equation for profit per unit |
|
Definition
| Profit per unit = P – ATC |
|
|
Term
| equation for a firm's total loss |
|
Definition
| Total loss = (ATC – P) x Q |
|
|
Term
| some market supply assumptions |
|
Definition
1) All existing firms and potential entrants have identical costs.
2) Each firm’s costs do not change as other firms enter or exit the market.
3) The number of firms in the market is
-fixed in the short run (due to fixed costs)
-variable in the long run (due to free entry and exit) |
|
|
Term
| when each form produces its profit maximizing quantity |
|
Definition
|
|
Term
| If existing firms earn positive economic profit,... |
|
Definition
-new firms enter, SR market supply shifts right.
-P falls, reducing profits and slowing entry. |
|
|
Term
| If existing firms incur losses,... |
|
Definition
-some firms exit, SR market supply shifts left.
-P rises, reducing remaining firms’ losses. |
|
|
Term
|
Definition
| The process of entry or exit is complete— remaining firms earn zero economic profit. |
|
|
Term
| Zero economic profit occurs when... |
|
Definition
|
|
Term
| the zero-profit condition is... |
|
Definition
|
|
Term
|
Definition
|
|
Term
| Why Do Firms Stay in Business if Profit = 0? |
|
Definition
| because economic profit is revenue minus all costs |
|
|
Term
| In the zero-profit equilibrium, this happens regarding firms and accounting profit. |
|
Definition
-firms earn enough revenue to cover these costs
-accounting profit is positive |
|
|
Term
| In the long run, the typical firm earns this much profit. |
|
Definition
|
|
Term
| what the LR market supply curve looks like |
|
Definition
| The LR market supply curve is horizontal at P = minimum ATC. |
|
|
Term
| The LR market supply curve is horizontal if... |
|
Definition
1) all firms have identical costs, and
2) costs do not change as other firms enter or exit the market. |
|
|
Term
| Why the LR Supply Curve Might Slope Upward |
|
Definition
If either
1) Firms Have Different Costs
2) Costs Rise as Firms Enter the Market |
|
|
Term
| the equilibria of a competitive market |
|
Definition
-Profit-maximization: MC = MR
-Perfect competition: P = MR
-So, in the competitive eq’m: P = MC |
|
|
Term
| the equilibria of a firm in a perfectly competitive market |
|
Definition
| price = marginal revenue = average revenue |
|
|
Term
|
Definition
| a firm maximizes profit by producing the quantity where MR = MC |
|
|
Term
|
Definition
| a firm will exit in the long run |
|
|
Term
|
Definition
| a firm that is the sole seller of a product without close substitutes. |
|
|
Term
| the key difference between monopoly and perfect competition |
|
Definition
| A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power. |
|
|
Term
| the main cause of monopolies |
|
Definition
barriers to entry
other firms can't enter the market |
|
|
Term
| 3 sources of barriers to entry |
|
Definition
1. A single firm owns a key resource.
E.g., DeBeers owns most of the world’s diamond mines
2. The govt gives a single firm the exclusive right to produce the good.
E.g., patents, copyright laws
3. Natural monopoly: a single firm can produce the entire market Q at lower cost than could several firms. |
|
|
Term
|
Definition
| a single firm can produce the entire market Q at lower cost than could several firms. |
|
|
Term
| demand curve for a monopolist |
|
Definition
| the market demand curve, that is, slopes down |
|
|
Term
| P vs. AR for a monopolist |
|
Definition
|
|
Term
| MR vs. P for a monopolist |
|
Definition
| MR < P, whereas MR = P for a competitive firm |
|
|
Term
| D curve vs. MR curve for a monopolist |
|
Definition
| both slope down, but the MR curve is steeper |
|
|
Term
| the 2 effects Q has on a monopolist's revenue |
|
Definition
-output effect
-input effect |
|
|
Term
|
Definition
| higher output raises revenue |
|
|
Term
|
Definition
| lower price reduces revenue |
|
|
Term
| To sell a larger Q, the monopolist must reduce... |
|
Definition
| the price on all the units it sells |
|
|
Term
| For a monopolist, MR can be negative if... |
|
Definition
| the price effect exceeds the output effect (e.g., when Common Grounds increases Q from 5 to 6). |
|
|
Term
| Is a monopoly firm a price taker? |
|
Definition
|
|
Term
| in a monopoly firm, Q and P are... |
|
Definition
| jointly determined by MC, MR, and the demand curve |
|
|
Term
| why monopoly has no supply curve |
|
Definition
because a monopoly firm is...
-is a “price-maker,” not a “price-taker”
-Q does not depend on P; Q and P are jointly determined by MC, MR, and the demand curve. |
|
|
Term
|
Definition
|
|
Term
| why monopoly results in a deadweight loss |
|
Definition
-The value to buyers of an additional unit (P) exceeds the cost of the resources needed to produce that unit (MC).
-The monopoly Q is too low – could increase total surplus with a larger Q. |
|
|
Term
| why monopoly results in a deadweight loss (simplified) |
|
Definition
| because monopoly e'librium quantity is less than competitive e'librium quantity |
|
|
Term
|
Definition
| selling the same good at different prices to different buyers. |
|
|
Term
| the characteristic used in price discrimination |
|
Definition
|
|
Term
| perfect price discrimination |
|
Definition
when the monopolist produces the competitive quantity, but charges each buyer his or her WTP
no dead weight loss |
|
|
Term
| why perfect price discrimination is impossible |
|
Definition
-No firm knows every buyer’s WTP
-Buyers do not reveal it to sellers
because of this, firms group customers based on something likely related to WTP, such as age |
|
|
Term
| some examples of Public Policy Toward Monopolies |
|
Definition
-Increasing competition with antitrust laws
-Regulation
-Public ownership
-Doing nothing |
|
|
Term
| public policy towards monopolies by Increasing competition with antitrust laws |
|
Definition
| Ban some anticompetitive practices, allow govt to break up monopolies. |
|
|
Term
| public policy towards monopolies by regulation |
|
Definition
-Govt agencies set the monopolist’s price.
-For natural monopolies, MC < ATC at all Q, so marginal cost pricing would result in losses.
-If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit. |
|
|
Term
| example of public policy towards monopolies by public ownership |
|
Definition
|
|
Term
| disadvantage of public policy towards monopolies by public ownership |
|
Definition
| usually less efficient since no profit motive to minimize costs |
|
|
Term
| why public policy towards monopolies might do nothing |
|
Definition
| The foregoing policies all have drawbacks, so the best policy may be no policy |
|
|
Term
| many firms have market power, due to |
|
Definition
-selling a unique variety of a product
-having a large market share and few significant competitors |
|
|
Term
| some ways monopolies arise due to barriers to entry |
|
Definition
| government-granted monopolies, the control of a key resource, or economies of scale over the entire range of output |
|
|
Term
| this causes a monopoly's marginal revenue to fall below price |
|
Definition
| must reduce price to sell a larger quantity due to downward-sloping demand curve for its product |
|
|
Term
| Monopoly firms maximize profits by... |
|
Definition
| producing the quantity where marginal revenue equals marginal cost. |
|
|
Term
| this leads to a monopoly having a deadweight loss |
|
Definition
| Since marginal revenue is less than price, the monopoly price will be greater than marginal cost, leading to a deadweight loss. |
|
|
Term
| Monopoly firms (and others with market power) try to raise their profits by... |
|
Definition
| charging higher prices to consumers with higher willingness to pay. This practice is called price discrimination. |
|
|
Term
| how policy makers might respond to monopolies |
|
Definition
| by using antitrust laws to promote competition, or by taking over the monopoly and running it |
|
|
Term
|
Definition
| competition that lies between perfect competition and monopoly |
|
|
Term
| types of imperfect competition |
|
Definition
| oligopoly and monopolistic competition |
|
|
Term
|
Definition
| only a few sellers offer similar or identical products |
|
|
Term
|
Definition
| many firms sell similar but not identical products |
|
|
Term
| characteristics of monopolistic competition |
|
Definition
-Many sellers
-Product differentiation
-Free entry and exit
-no long run econ profits
-firm has market power
-firm has downward sloping D curve
-many close substitutes |
|
|
Term
| MR vs. P in monopolistic competition |
|
Definition
|
|
Term
| This is what a firm does in monopolistic competition to maximize profot |
|
Definition
|
|
Term
| what to plot on a graph when identifying a firm's profit and losses in a competitive market |
|
Definition
|
|
Term
| what to plot on a graph when trying to find the profit maximizing Q for a firm in a monopoly |
|
Definition
MC
downward sloping MR
D
profit maximizing Q is where MR = MC |
|
|
Term
| what to plot on a graph when trying to find a monopoly's profit |
|
Definition
MC
downward sloping MR
D
ATC |
|
|
Term
| what to plot on a graph when trying to find a monopolistically competitive firm's short run profits or losses |
|
Definition
MC
ATC
D
downward sloping MR
firm uses the D curve to set P |
|
|
Term
| short run firm behavior of monopolistic competition compared to that of a monopoly |
|
Definition
|
|
Term
| long run behavior of monopolistic competition |
|
Definition
In monopolistic competition, entry and exit drive economic profit to zero.
-If profits in the short run: New firms enter market, taking some demand away from existing firms, prices and profits fall.
-If losses in the short run: Some firms exit the market, remaining firms enjoy higher demand and prices. |
|
|
Term
| In monopolistic competition, entry and exit occur until... |
|
Definition
| P = ATC and profit = zero |
|
|
Term
| Why Monopolistic Competition Is Less Efficient than Perfect Competition |
|
Definition
1. excess capacity
2. markup over marginal cost |
|
|
Term
| excess capacity in monopolistic competition |
|
Definition
| The monopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output. |
|
|
Term
| excess capacity in perfect competition competition |
|
Definition
| Under perfect competition, firms produce the quantity that minimizes ATC |
|
|
Term
| markup over marginal cost under monopolistic competition |
|
Definition
| Under monopolistic competition, P > MC |
|
|
Term
| markup over marginal cost under perfect competition |
|
Definition
| Under perfect competition, P = MC |
|
|
Term
regarding monopolistic competition:
Because P > MC,... |
|
Definition
| market quantity < socially efficient quantity |
|
|
Term
regarding monopolistic competition:
Because ______, market quantity < socially efficient quantity |
|
Definition
|
|
Term
| why policy makers can't require firms to reduce prices |
|
Definition
| because they make zero profits |
|
|
Term
| external effects from the entry of new firms in monopolistic competition |
|
Definition
-The product-variety externality
-The business-stealing externality |
|
|
Term
| The product-variety externality |
|
Definition
| surplus consumers get from the introduction of new products |
|
|
Term
| The business-stealing externality |
|
Definition
| losses incurred by existing firms when new firms enter market |
|
|
Term
| In monopolistically competitive industries, this naturally leads to the use of advertizing. |
|
Definition
| product differentiation and markup pricing |
|
|
Term
| a general rule of advertising |
|
Definition
| In general, the more differentiated the products, the more advertising firms buy. |
|
|
Term
| critiques of advertising believe... |
|
Definition
-Society is wasting the resources it devotes to advertising.
-Firms advertise to manipulate people’s tastes.
-Advertising impedes competition—it creates the perception that products are more differentiated than they really are, allowing higher markups. |
|
|
Term
| defenders of advertising believe... |
|
Definition
-It provides useful information to buyers.
-Informed buyers can more easily find and exploit price differences.
-Thus, advertising promotes competition and reduces market power. |
|
|
Term
| why a firm might spend huge amounts of money on advertising |
|
Definition
| to show people the quality of their products |
|
|
Term
| critics of brand names believe... |
|
Definition
-Brand names cause consumers to perceive differences that do not really exist.
-Consumers’ willingness to pay more for brand names is irrational, fostered by advertising.
-Eliminating govt protection of trademarks would reduce influence of brand names, result in lower prices. |
|
|
Term
| defenders of brand names believe... |
|
Definition
-Brand names provide information about quality to consumers.
-Companies with brand names have incentive to maintain quality, to protect the reputation of their brand names. |
|
|
Term
|
Definition
when a firm produces less than the quantity that minimizes ATC
each firm in a monopolistically competitive market does this |
|
|
Term
| the price each firm charges |
|
Definition
| a price above marginal cost |
|
|
Term
| Monopolistic competition has a deadweight loss caused by... |
|
Definition
| the markup of price over marginal cost |
|
|
Term
|
Definition
| the percentage of the market’s total output supplied by its four largest firms. |
|
|
Term
| c'tration ratio vs. competition |
|
Definition
| The higher the concentration ratio, the less competition. |
|
|
Term
|
Definition
| a market structure in which only a few sellers offer similar or identical products. |
|
|
Term
| Strategic behavior in oligopoly |
|
Definition
| A firm’s decisions about P or Q can affect other firms and cause them to react. The firm will consider these reactions when making decisions. |
|
|
Term
|
Definition
| the study of how people behave in strategic situations. |
|
|
Term
|
Definition
|
|
Term
| One possible duopoly outcome |
|
Definition
|
|
Term
|
Definition
| an agreement among firms in a market about quantities to produce or prices to charge |
|
|
Term
|
Definition
| a group of firms acting in unison, e.g., AT&T and Verizon in the outcome with collusion |
|
|
Term
| It is difficult for oligopoly firms to form ______ and honor ______. |
|
Definition
|
|
Term
|
Definition
| a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen |
|
|
Term
| When firms in an oligopoly individually choose production to maximize profit, |
|
Definition
-oligopoly Q is greater than monopoly Q but smaller than competitive Q.
-oligopoly P is greater than competitive P but less than monopoly P. |
|
|
Term
| the noncooperative oligopoly outcome |
|
Definition
| between the monopoly and competitive outcomes |
|
|
Term
| Increasing output has these effects on a firm's profits. |
|
Definition
-output effect
-price effect |
|
|
Term
|
Definition
| If P > MC, increasing output raises profits. |
|
|
Term
|
Definition
| Raising output increases market quantity, which reduces price and reduces profit on all units sold. |
|
|
Term
| If output effect > price effect,... |
|
Definition
| the firm increases production. |
|
|
Term
| If price effect > output effect,... |
|
Definition
| the firm reduces production. |
|
|
Term
| as the # of firms in an oligopoly increases,... |
|
Definition
-the price effect becomes smaller
-the oligopoly looks more and more like a competitive market
-P approaches MC
-the market quantity approaches the socially efficient quantity |
|
|
Term
| another benefit of international trade |
|
Definition
| Trade increases the number of firms competing, increases Q, brings P closer to marginal cost |
|
|
Term
| game theory helps us understand... |
|
Definition
| oligopoly and other situations where “players” interact and behave strategically. |
|
|
Term
|
Definition
| a strategy that is best for a player in a game regardless of the strategies chosen by the other players |
|
|
Term
|
Definition
| a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial |
|
|
Term
| example of a payoff matrix |
|
Definition
[image]
this shows their profits with each decision |
|
|
Term
| pros and cons of the noncooperative oligopoly e'librium |
|
Definition
-Bad for oligopoly firms: prevents them from achieving monopoly profits
-Good for society:
+Q is closer to the socially efficient output
+P is closer to MC |
|
|
Term
| 2 strategies that may lead to cooperation |
|
Definition
-If your rival reneges in one round, you renege in all subsequent rounds.
-“Tit-for-tat” Whatever your rival does in one round (whether renege or cooperate), you do in the following round. |
|
|
Term
|
Definition
| Whatever your rival does in one round (whether renege or cooperate), you do in the following round. |
|
|
Term
| production and prices in oligopolies |
|
Definition
| In oligopolies, production is too low and prices are too high, relative to the social optimum. |
|
|
Term
| role for policy makers in oligopolies |
|
Definition
-Promote competition
-prevent cooperation to move the oligopoly outcome closer to the efficient outcome |
|
|
Term
|
Definition
1890
Forbids collusion between competitors |
|
|
Term
|
Definition
1914
Strengthened rights of individuals damaged by anticompetitive arrangements between firms |
|
|
Term
| 3 business practices that might be stifled by policy makers |
|
Definition
1. Resale Price Maintenance (“Fair Trade”)
2. Predatory Pricing
3. Tying |
|
|
Term
| Resale Price Maintenance (“Fair Trade”) |
|
Definition
| Occurs when a manufacturer imposes lower limits on the prices retailers can charge. |
|
|
Term
| why Resale Price Maintenance (“Fair Trade”) is often opposed |
|
Definition
| because it appears to reduce competition at the retail level |
|
|
Term
| the market power of the manufacturer is at this level |
|
Definition
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Term
| the legitimate objective of Resale Price Maintenance (“Fair Trade”) |
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Definition
| preventing discount retailers from free-riding on the services provided by full-service retailers |
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Term
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Definition
preventing discount retailers from free-riding on the services provided by full-service retailers
Illegal under antitrust laws, but hard for the courts to determine when a price cut is predatory and when it is competitive & beneficial to consumers. |
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Term
| Many economists doubt that predatory pricing is a rational strategy because... |
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Definition
-It involves selling at a loss, which is extremely costly for the firm.
-It can backfire. |
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Term
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Definition
| Occurs when a manufacturer bundles two products together and sells them for one price (e.g., Microsoft including a browser with its operating system). |
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Term
| the argument critics use against tying |
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Definition
| Critics argue that tying gives firms more market power by connecting weak products to strong ones. |
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Term
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Definition
| Firms may use tying for price discrimination, which is not illegal, and which sometimes increases economic efficiency. |
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Term
| Oligopolists can maximize profits if they... |
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Definition
| form a cartel and act like a monopolist. |
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Term
| one reason firms in an oligopoly have a hard time cooperating |
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Definition
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Term
| Policymakers use the antitrust laws to... |
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Definition
| prevent oligopolies from engaging in anticompetitive behavior such as price-fixing. |
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Term
| Equation for Nash equilibrium |
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Definition
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