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ECO 2023: EXAM 3
Which of the following is a unique characteristic of the oligopolistic market structure? |
mutual interdependence among firms in demand, and thus, in price decisions
|
Which of the following is most likely to contribute to the presence of monopoly in an industry? |
economies of scale
|
What is one key characteristic that is distinctive of an oligopoly market? |
The decisions of one seller often influence the price of products, the output, and the profits of rival firms
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At his current level of output, a monopolist has an MR of $10, an MC of $6, and an economic profit of zero. If the market demand curve is downward sloping and his marginal cost curve upward sloping, which of the following is true? |
The firm could increase his profit by increasing his output
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Which of the following will reduce the likelihood of effective collusion among oligopolistic producers? |
inability to keep new firms from entering the market
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Why is it difficult to predict the behavior of oligopolistic firms? |
Firms in oligopolistic industries react to each other's behavior in many ways
|
In essence, patents grant their owners which of the following? |
A property right to new products and production processes that they have developed.
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A profit-maximizing monopolist will continue expanding output as long as |
marginal revenue exceeds marginal cost.
|
Price taker |
-a lot of sellers
-sell an identical product
-market has a lot of buyers
-no barriers to exit or enter
-perfectly competitive firms
*bc ^ they don't worry about other firms bc selling same product
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Price takers are willing to run at ______ profit because it covers all cost |
normal/ zero profit
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Profit equation |
revenue - cost
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Accounting profit |
includes opportunity cost. total revenue is greater than total cost. revenues cover cost.
|
economic profit |
doesn't include opportunity cost. earn return on capital that is higher than what can be earned in other markets.
|
A firm decides whether to stay open or not based on |
if it can cover its variable cost
p>avc (average variable cost)
mr>avc
tr>tvc
|
negative fixed cost equals |
profit of firm if it closes
|
price taker firm should stop producing if |
market price is less than average variable cost
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Price taker maximizes profit by |
deciding whether to stay open and if so how much to produce
|
what does competition do |
-reduce cost for firms
-reduce price for consumer
-forces firms to be more efficient
-shirts resources to productive areas
-shifts power from producers to consumers
|
profit means |
people value firms good more than resource
|
loss means |
people value original resource more than firms product
|
competition promotes prosperity by |
-motivating businesses to produce efficiently
-cater to the views of consumers
-innovate improvements
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self interest promotes economic progress because |
producers will be directed (invisible hand) towards wealth creating activities that generate economic progress
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If a company decides to stay open a price taking firm will maximize profit by |
producing at a point where mr=mc
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If mc>mr a price taking firm should |
decrease production
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Price searcher |
-Many Sellers
-low entry barriers
-sell differentiated but similar products (think fast food: chipoltle and moes)
-variety of products means higher prices
-monopolistic competition
|
Price searcher firm will close if |
mr<avc
tr<tvc
|
Price searcher firm will keep producing as long as |
mr>mc
p>atc |
In a price searcher market there is only a ________ supply and demand curve |
firm |
If mc>mr in a price searcher market |
raise price and decrease output
|
If mr>mc in a price searcher market |
decrease price and raise output
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If profits exist the in short run in a price searcher market new firms will |
enter causing market price to decrease
|
when p=atc in price searcher market |
equilibrium |
when p>atc in price searcher market |
profit
|
when p |
loss |
What happens in the long run in a price searcher market? |
reach zero economic profit but even with zero economic profit you can still have positive accounting profit bc it doesn't include opportunity cost
|
At long run equilibrium in price searcher market the market will earn |
normal economic profit
|
*In the long run neither price takers or competitive price searchers will earn economic profits |
... |
entrepreneur |
person that makes decision based on uncertainty, discovery and judgment. decisions can't be graphed or modeled
|
how do entrepreneurs effect economic progress |
discover new products and services that create wealth
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price searchers prices are ________ than price takers because of _________ |
higher because of advertising expensess
|
price discrimination |
charging different groups of people different prices for the same good
|
who can price discriminate? |
-firm with downward sloping demand curve(lower price, more will be bought)
-can separate customers into two groups(elastic [sensitive to price aka cheap] and inelastic)
-can prevent customers from re-trading product
|
Firms discriminate by setting |
-high prices for customers with inelastic demand
-low prices for customers with elastic demand
ex: movie theater charging students less for tickets
|
more firms in a price searcher market means |
more competition and lower prices for consumers
|
more differentiation in a price searcher market means |
higher prices because higher atc
|
monopoly |
-single seller
-no substitute goods
-high barriers to entry
*economies of scale
* government licensing or legal barriers (most secure)
* someone else owns all resources
|
economies of scale |
fixed cost are large so bug firms have lower average total per untit cost than smaller ones. This means to enter this market you have to start with a large firm otherwise you atc will be too high meaning your price would be higher than the larger firms
Ex: drug company
|
government licensing or legal barriers |
license or patent may prevent you from making same goods as a business or make start up cost too costly
Ex: US Postal
|
Entry barriers are important for a monopoly because |
the create market power
|
key to a monopoly is |
keeping potential rivals out
|
A monoploy will continue to produce as long as |
mr>mc.
meaning the monopolist would decrease price and increase output
|
if mc>mr a profit maximizing monopolist would |
increase price and decrease decrease output
|
Is a monopoly guaranteed long and short run profit? |
No
Demand could shift left
Curves could shift up
|
Oligopoly |
-interdependence among firms (depend on each other)
-leads to strategic behavior. Firms concerned with what the others doing, base decisions on what they think the other ones doing
|
In an oligopoly, the decision of one seller |
influences the price, profits, products, profits and outputs of rival firms
|
Monopolistically competitive firms |
only somewhat concerned with what other firms do because selling differentiated product and they come together to decide what to charge
|
Price and output decision of oligopoly |
sometimes act like price takers and accept decision of group and sometimes act like monopolist and set the price of the group
many time firms collude to keeps prices high
ex: bars in tallahassee
|
A group of oligopolist would maximize profit |
if they act as monopolist and charge the same price as a monopolist would
|
If oligopolist agree to charge high prices (cut supply and raise price) |
cheating would occur by one firm charging less
|
If all oligopolist agreed to keep production low |
it would be good for all firms but the incentive to cheat would be high
|
Two conflicting tendencies that a firm has in an oligopolistic industry are |
the incentive to cooperate to maximize joint profits and the incentive to cheat on the agreement to increase profits
|
hard for economist to predict prices in oligopoly bc |
can't predict firms reactions to the actions and decisions of other firms
|
difficult to analyze oligopolistic behavior bc |
of the interdependent nature of decision making by firms
|
defects of markets with high entry barriers (monopoly and oligopoly) |
-output is lower because their are fewer firms
-price is higher because their is less competition
-some gains from trade are not realized (deadweight loss)
-variety is lower because their are less firms in the market to differentiate the product
|
suppose market in initially competitive with firms selling same product but merging of firms results in market being served by three or four firms. As a result you would expect a ______ in output and ______ in price |
decrease, increase
|
ways to prevent industries with high entry barriers |
Anti-trust polocies
|
Anti-trust Policies |
policies/ laws made to ensure competition is present
-reduce artificial barriers to trade (tariffs, quotas and licensing)
-regulate price and output of firms with high barriers to entry (force to lower price and increase output)
-government produces the good, often leads to inefficiency (UPS)
|
To maximize profit monopoly's will charge price where |
mr=mc
|
Oligoploy's key characteristic |
interdependence among firms
|
In LR monopolies are able to |
make economic profit, they can do this in the short run as well
|
p is above MC for price taker firm |
mr>mc
the firm should increase output
|
price taker doesn't effect |
price |
if a price searcher raises price then |
some sales will be lost where as in a price taker all would be lost
|
Price searcher deals with |
ATC
|
firms are earning economic profit in price searcher firm, what will happen in the LR |
decrease in demand and in price because of new compitiion entering the market
|
variety of good means |
higher prices
|
in the LR a monopoly will earn |
profit, loss of break even. Depends on firm and operations
|
most firms in market to least |
price taker
/
price searcher with low entry barriers
/
oligopoly
/
price searcher with high entry barrier
/
monopoly
|
Price searcher with low entry barriers has the most __________ |
differentiation
|
___________ has the most market power |
monopoly
|
has 4 or 5 firms |
oligopoly
|
characterized by cheating |
oligopoly
|
this market has no reason to change its price |
price takers
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Which of the following is true when the conditions in a competitive price-taker market are such that the firms are consistently unable to cover their production costs? |
Some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return
|
What is implied if a firm is losing money? |
The value of the resources used to make the product is being reduced.
|
The owners of a firm are earning economic profit if |
they are earning a return on their capital that is higher than what can generally be earned in other markets.
|
Competition as a dynamic process implies that individual firms in a market |
it is covering all costs, including the opportunity cost of capital and labor.
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Which of the following is true regarding the dynamic process of competition |
It puts the profit motive of sellers to work for buyers.
|
What will happen to a firm earning zero economic profit? |
It is doing as well as typical firms in other markets.
|
Which of the following is true about the dynamic process of competition? |
It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers
|
When profits occur in a competitive market, this indicates tha |
consumers value the goods more than the resources used to produce them
|
What must profit-seeking entrepreneurs do in order to be successful? |
They must produce a product that the consumers value more than the resources required for its production.
|
What will happen to the demand curves of existing firms when a new firm enters a competitive price-searcher market? |
They will shift to the left
|
For effective price discrimination to occur, a seller must |
be able to prevent consumers from reselling the product to other consumers
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What will happen to a firm in a competitive price-searcher market if it raises price? |
It will lose only some of its sales.
|
Which of the following is a necessary condition for price discrimination to be profitable? |
Groups of consumers with different demand elasticities must be easily distinguishable.
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A firm in a competitive price-searcher market can raise its price without losing all of its customers. Why? |
Because of product differentiation
|
A price-discriminating firm charges the lowest price to the group that |
has the most elastic demand
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When there is no decision rule that can be applied using only information that is freely available, which of the following is most needed? |
Entrepreneurial judgment.
|
When a firm exits a competitive price-searcher market, the individual demand curves faced by all remaining firms in that market will |
shift to the right.
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If a firm in a competitive price-searcher market finds that its marginal cost exceeds its marginal revenue at the current rate of output, what would be the profit maximizing action? |
Raise the price of the product and reduce its output.
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Which of the following is a necessary condition for price discrimination to be profitable? |
It must be easy to distinguish consumer groups with differing responses to higher prices.
|