UT Arlington ECON 2306 - Exam 3 Study Guide (9 pages)

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Exam 3 Study Guide

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Exam 3 Study Guide


Study Guide
University of Texas at Arlington
Econ 2306 - Principles of Microeconomics
Principles of Microeconomics Documents
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ECON 2306 1st Edition Exam 3 Study Guide Lectures 9 13 Lecture 9 October 22 Chapter 9 Oligopoly Oligopoly Oligopoly a market structure dominated by a few large producers of homogenous or differentiate products Oligopolists have control over price output and advertising A Few Large Producers Like the aluminum industry or a few small auto parts store in a medium sized town Big 3 4 or 5 is monopolistic industry Also tires beer cigarettes copper greeting cards lightbulbs aircraft cars gypsum and cereal Either Homogenous of Differentiated Products Homogenous oligopoly an oligopoly in which the firms produce a standardized product Differentiated oligopoly an oligopoly in which the firms produce a differentiated product Steel zing copper cement lead and alcohol are examples of standardized products Cars appliances electronics cereals cigarettes and sporting goods are differentiated Differentiated has more nonprice competition by advertising Control over Price but Mutual Interdependence Each firm is a price maker but it must consider how rivals will react to price changes Characterized by strategic behavior and mutual interdependence Strategic behavior selfinterested behavior that takes into account the reactions of others Mutual interdependence a situation in which a change in strategy usually price by one firm will affect the sales and profits of other firms Entry Barriers Same entry barriers for pure monopoly Economies of scale ownership of raw materials and pricing and advertising Mergers Sometimes oligopolies come through mergers Like steel airlines banking and entertainment Can allow firms to achieve greater economies of scale lower prices and increase market share Oligopoly Behavior A Game Theory Overview Game theory the study of how people or firms behave in strategic situations Mutual Interdependence Revisited Firms can influence rival s profits by changing their pricing strategies Each firm s profit depends on its own and rivals pricing strategies Collusion Collusion a situation in which firms act together and in agreement to fix prices divide markets or otherwise restrict competition Fixes mutually low price competitive strategies Incentive to Cheat Firms can agree to collude but secretly cheat Both firms will probably cheat Kinked Demand Model Per se violation a collusive action such as an attempt to fix prices or divide a market that violates the antitrust laws even if the action is unsuccessful Kinked Demand Curve Kinked demand curve a demand curve based on the assumption that rivals will ignore a price increase and follow a price decrease Rivals ignore and rivals match segment If rivals ignore a price increase but match a price decrease the marginal revenue curve will have an odd shape Price Inflexibility Kinked demand explains why prices are generally stable in noncollusive oligopolistic industries There are demand and cost reasons Demand if price raises customers won t buy if it lowers sales will increase modestly Cost broken marginal revenue curve means that even if an oligopolist s costs change a lot the firm may have no reason to change its price Price Leadership Price Leadership an implicit understanding that other firms will follow the lead when a certain firm in the industry initiates a price change Dominant firm initiates price change Infrequent price changes price leader does not respond to small daily changes only when cost and demand is significant and on an industry basis Communications price leader communicates price adjustments to industry through speeches trade publication interviews or press releases Avoidance of price wars price leaders try to prevent price wars Collusion Collusion is tempting in kinked demand and price leadership Collusion reduces uncertainty It has a variety of firms including a cartel Cartel a formal agreement among producers to set the price and the individual firm s output levels of a product Cartels are overt open to view Most collusions are covert and illegal Joint Profit Maximization Colluding can charge the same price among firms Obstacles to Collusion Demand and Cost Differences Mainly with differentiated products Profit maximizing price will differ among firms Number of Firms The more the firms the harder it is to create a cartel or other collusion Cheating Temptation for collusive oligopolists to cheat Buyers can exploit the system and cause price wars Cheating threatens collusion Recession Long lasting recession hurts collusion because bad markets increase average total cost Demand and marginal revenue curves shift to the left Firms cut costs at expense of rivals Potential Entry The greater prices an profits may attract new entrants Firms must block entry for successful collusion Oligopoly and Advertising Oligopolists would rather not compete on price Each firm s share in the total market is dete4rmined through product development and advertising Advertising affects prices competition and efficiently positively or negatively Positive Effects of Advertising Gives customers information Low cost Diminishes monopoly power Enhances efficiency Enhances competition Introduces new products Can reduce long run average total cost by obtaining economies of scale Potential Negative Effects of Advertising Manipulates or persuades consumers Can be misleading Firms establish brand name loyalty New entrants need to incur large advertising costs Can be self cancelling Oligopoly and Efficiency Inefficiency Production where price exceeds marginal cost and average total cost Neither productive or allocative efficiency happens Oligopoly less desirable than pure monopoly Qualifications Increased foreign competition Limit pricing Technological advance Lecture 10 October 27 Chapter 10 Wage Determination A Focus on Labor 70 of all income is wages and salaries Purely competitive labor market a labor market in which a large number of similarly qualified workers independently offer their labor services to a large number of employers none of whom can set the wage rate Numerous employers compete to hire a specific type of labor each worker with identical skills supplies that type and individual employers and workers are wage takers because neither can control the market wage rate Labor Demand Labor demand is schedule or curve showing amounts of labor buyers are willing and able to purchase at various hourly wages Derived demand the demand for a resource that results from the demand and for the products it helps produce Marginal Revenue Product Resource

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