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ECON 202:Exam three
Industry Supply Curve
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The relationship between the price of a good and the total output of the industry as a whole
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Short-run industry supple curve
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Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms
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Short-run Market Equilibrium
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When the quantity supplied equals the quantity demanded
taking the number of producers as given
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Long-run Market Equilibrium
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When the quantity supplied equals the quantity demanded
Given that sufficient times has elapsed for entry and exit from the industry
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Market Structure
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Describes characteristics of a market organization that determine the terms of behavior within an industry.
1.whether products are differentiated
2. the number of firms in the industry-- one, few or many
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Types of Markets
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Perfect Competition
Monopoly
Oligopoly
Monopolistic Competition
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Price Takers
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When actions cannot affect the market price of the good or service it sells
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Perfectly Competitive Market
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all market participants both consumers and producers are price takers
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Price- Taking Consumers
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Consumer who cannot influence the market price of the good or service by their actions
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Perfectly Competitive industry
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An industry in which firms are price-takers
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Two necessary conditions for perfect competition
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1. Market Share
2. Standardized Product
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Market Share
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The fraction of the total industry output accounted for by that firms output
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Standardized Product
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When consumers regard the products of different firms as the same good
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Free Entry and Exit
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When firms can freely and easily enter into an industry and exit the firm just as easily
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Monopoly
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One firm is the sole firm of one product
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Monopolist
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the one firm in the monopoly
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Why do monopolies exist?
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barrier to entry
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Barrier to Entry
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Prevents other firms from entering the industry
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Types of barriers to entry
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1.Control of a scarce resource or input
2.Economies of scale
3.Technological Superiority
4.Government-created barriers
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Control of a Scarce Resource or input
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Companies block entry by securing exclusive access to key inputs
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Economies of Scale
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Can give a rise to and sustain a monopoly
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Technological Superiority
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A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist
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Natural Monopoly
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Exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output
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Copyright
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gives the creator of a literary or artistic work the sole right to profit from their work for 70 years
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Patent
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Gives an inventor the sole right to make, use or sell that invention 16-20 years
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Oligopoly
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few sellers, each seller produces a large portion of all products sold
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Oligopolist
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A producer in the Oligopoly market
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Imperfect Competition
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When no firm has a monopoly but producers nonetheless realize that they can affect market prices
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Concentration Ratios
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Measure the percent of industry sales accounted for by the "X" largest firms
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Herfindahl-Hirschman Index
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The square of each firms share of market sales summed over the industry.
It gives a picture of the industry market structure
ex-- HHI= 60^2+25^2+15^2= 4,450
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Monopolistic Competition
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Market structure in which there are MANY competing firms in an industry, and each firm sells a differentiated product, and there is free entry and exit from the industry in the long run
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Optimal Output Rule
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Price-taking firms profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
Output--- Marginal Revenue= Marginal Cost
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Optimal Point
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Market Price (D)= Marginal Cost
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Marginal Revenue Curve
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Shows how marginal revenue varies as an output varies
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When is production profitable?
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1. if total revenue > total cost-- profitable
2. if total revenue = total cost-- firm breaks even
3. if total revenue < total cost-- firm incurs a loss
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Costs and production in shirt-run
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Is where marginal cost cuts the average total cost curve at its minimum
Minimum average total cost is equal to the firms break-even price
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Break- even price
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taking firm is the market price at which it earns 0 profits
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Market Price
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1. exceeds minimum average total cost-- producer is profitable
2. equals minimum average total cost-- producer breaks even
3. less than minimum average total cost-- producer is unprofitable
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Shut Down Price
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The price where average revenue is equal to average variable cost
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Short-run individual supply curve
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shows how an individual firm's profit maximizing level of output depends on the market price taking fixed cost as given
gives the relationship quantity supplied
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Changing fixed cost
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1. cannot be altered in short-run
2. firms can acquire or get rid of them in long-run
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Industry Supply Curve
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relationship between the price and the total output of an industry as a whole
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Short-run industry supply curve
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cuve shows how the quantity supplied by an industry depends on the market prince given a fixed # of firms
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Short-run market equilibrium
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when the quantity supplied equals the quantity demanded
taking the # of producers as given
Q supplied= Q demanded
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long-run market equilibrium
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the quantity supplied equals the quantity demanded
if sufficient time has elapsed for entry into and exit from the industry to occur
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long0run industry supply curve
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shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry
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shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry
Monopolist
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the sole supplier of its good or service
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Opposing effects on revenue
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1. Quantity Effect
2. Price Effect
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Quantity Effect
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One more unit sold-- it increases total revenue by the price at which the unit was sold
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Price Effect
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to sell that last unit, monopolist must cut the market price on all units sold== decreases total revenue
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Maximize Profit
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MR=MC
monopolists profit- maximizing quantity of output
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Price- taking firms optimal output
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produce the output level at when MC of the last unit produced is equal to the market price
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P > MR = MC
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Marginal Revenue is influenced by the price effect, so that marginal is less than price in a monopoly
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P = MC
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each producer acts as if marginal revenue is equal to the market price in perfect competition
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Monopoly does:
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1.produces smaller quantity
2. charges a higher price
3. earns a profit
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Monopoly can produce more but only if the price elasticity of demand is _____.
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Greater than 1
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Welfare Effectsof Monopoly
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1. Reduces output and raises price above marginal cost
2. Monopolist captures consumer surplus as profit and causes dead weight loss
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Preventing Monopoly Power
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1. Antitrust Policy-- government policies used to prevent or eliminate monopolies
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Natural Monopoly
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an industry in which firms have economies of scale over any relevant range of output
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Public Ownership
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the good is supplied by the government or by a firm owned by the government
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Price Regulation
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limits prices firms can charge
Example- an Utilities Company
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Tit for Tat
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Involves playing, cooperatively at first, then doing whatever the other player did in the pervious section
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Tacit Collusion
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Limited by a number of factors
1. large numbers of firms
2. complex products + pricing scheme
3. bargaining power of buyers
4. conflicts of interest among firms
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Price War
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when firms cut prices to take sale from competitors
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Product Differentiation
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an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry
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Price Leadership
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One firm sets the price and other firms follow
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Non-price Competition
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using advertising and other means to increase their sales
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Price Discrimination
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Sellers use this when they charge different prices to different consumers for the same good
depends on their willingness to pay
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Single-price Monopolist
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charges all consumers the same price
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Perfect Price Discrimination
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takes place when a monopolist charges each consumer his or her willingness to pay
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Common Techniques for price discrimination are:
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1. advance purchase restrictions
2. Volume discount
3. two part tariffs
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Duopoly
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oligopoly consisting of only two firms
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Collusion
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when sellers cooperate to raise each other's profits
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Cartel
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*** Strongest form of collusion
1. an agreement by several producers to obey output restrictions on order to increase their joint profits
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Non-cooperative behavior
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ignoring the effects of their actions on each others profits
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Interdependence
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when the decisions of two or more firms significantly affect each others profits
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Study of behavior in situations of interdependence is known as?
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Game Theory
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Payoff
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the reward a firm or "player" receives--profit
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Payoff Matrix
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shows how the payoff of each firm earns from every combination they can make
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Prisoners Dilemma
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When each firm has an incentive to cheat, but both are worse off if they both cheat
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Dominant Strategy
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When it is a players best action regardless of the action taken by the other player
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Nash Equilibrium or Non-cooperative Equilibrium
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the result when each player in game chooses the action that maximizes the firms payoff, given the actions of the other firms
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Strategic Behavior
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when it attempts to influence the future behavior of other firms
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