ECONOM 1051: EXAM 2
99 Cards in this Set
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Four Market Models
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Pure Competition, Monopolistic Competition, Oligopoly, Pure Monopoly
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Pure competition
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involves a very large number of firms producing a standardized product. New firms can enter or exit very easily.
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Monopolistic competition
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Relatively large number of sellers producing differentiated products (clothing, furniture, books).
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Oligopoly
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Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals.
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Pure Monopoly
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Market structure in which one firm is the sole seller of a product of service for which there is no good substitute (local electric utility or patented medical device).
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non price competition
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One firm tries to distinguish its product of service from all competing products on the basis of attributes such as design and workmanship.
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Pure competition characteristics
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Large number of independently acting sellers, standardized product, "price takers", free entry and exit.
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Price takers
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A seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).
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Average revenue
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Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.
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Total revenue
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The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
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Marginal revenue
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The change in total revenue that results from the sale of 1 additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold.
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MR=MC rule
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The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
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Profit Maximization in the Long Run
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Entry and Exit only, Identical costs, and constant-cost industry.
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Constant cost industry
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An industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs.
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Increasing cost Industry
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An industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs.
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Decreasing-cost Industry
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An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.
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Productive efficiency
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P= minimum ATC
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Allocative efficiency
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P=MC
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Pure Monopoly
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Single seller, no close substitutes, price maker, blocked entry.
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Barriers to entry
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Anything that artificially prevents the entry of firms into an industry.
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Natural monopoly
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An industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product.
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Patent
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exclusive right of an inventor to use, or to allow another to use, her or his invention.
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Pure Monopoly
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Patents, economies of scale, or resource ownership secure our firm's monopoly.
No unit of government regulates the firm.
The firm is a single-price monopolist; it charges the same price for all units of output.
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Productive efficiency
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achieved because free entry and exit forces firms to operate where their average total cost is at minimum
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Allocative efficiency
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results because production occurs up to that output at which price equals marginal cost (P=MC)
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Simultaneous consumption
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a products ability to satisfy a large number of consumers at the same time
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Network effects
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increases in the value of a product to each user, including existing users, as the total number of users rises. Drives a market toward monopoly because because consumers tend to choose standard products that everyone is using.
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X- inefficiency
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the production of output, whatever its level, at higher than the lowest average cost.
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rent seeking behavior
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The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.
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Price discrimination
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the selling of a product to different buyers at different prices when the price differences are not justified by differences of cost.
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Price discrimination is possible when...
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Monopoly power, market segregation (seller must be able to segregate buyers into distinct classes, each of which has a different willingness or ability to pay for the product), and no resale (original purchaser cannot resell the product or service).
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Rule of reason
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The rule stated and applied in the U.S. Steel case that only combinations and contracts unreasonably restraining trade are subject to actions under the antitrust laws and that size and possession of monopoly power are not illegal.
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Monopolistic competition
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market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition.
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Monopolistic competition involves...
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small market shares (Each firm has a comparatively small percentage of the total market and consequently has limited control over market price.), no collusion (he presence of a relatively large number of firms ensures that collusion by a group of firms to restrict output and set prices is…
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product differentiation
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A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).
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Important aspects of product differentiation
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Product attributes, service, location, brand names and packaging, and some control over price. Easy entry and exit, advertising is important.
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Nonprice competition
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Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers.
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excess capacity
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Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.
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.Oligopoly
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A market structure in which a few firms sell either a standardized or a differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typ…
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Characteristics of oligopoly
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a few large producers, either homogeneous or differentiated products, control over price, but mutual interdependence
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homogeneous oligopoly
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An oligopoly in which the firms produce a standardized product.
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differentiated oligopoly
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An oligopoly in which the firms produce a differentiated product.
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strategic behavior
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Self-interested economic actions that take into account the expected reactions of others.
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mutual interdependence
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situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect the other rivals to react to the change.
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Oligopoly entry barriers
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economies of scale, large expenditure for capital
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Oligopoly mergers
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can happen in oligopolies
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game theory
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how people or firms behave in strategic situations.
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per se violations
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Collusive actions, such as attempts to fix prices or divide markets, that are violations of the antitrust laws, even if the actions are unsuccessful.
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kinked demand curve
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The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase.
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price leadership
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An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes.
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price leader is likely to observe the following tactics...
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infrequent price changes, communications, avoidance of price wars
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cartel
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formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically.
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obstacles to collusion
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demand and cost differences, number of firms, cheating, recession, and potential entry
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Oligopoly and efficiency
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increased foreign competition (foreign competition has increased rivalry in a number of oligopolistic industries), limit pricing, technological advance.
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national income and product accounts (NIPA)
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The national accounts that measure overall production and income of the economy and other related aggregates for the nation as a whole.
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gross domestic product (GDP)
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The total market value of all final goods and services produced annually within the boundaries of the United States, whether by U.S.- or foreign-supplied resources.
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intermediate goods
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Products that are purchased for resale or further processing or manufacturing.
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final goods and services
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Goods and services that have been purchased for final use and not for resale or further processing or manufacturing.
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personal consumption expenditures (C)
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The expenditures of households for durable and nondurable consumer goods and services.
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gross private domestic investment (Ig)
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Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.
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government purchases (G)
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Expenditures by government for goods and services that government consumes in providing public goods and for public capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services.
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Net exports (Xn)
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Exports minus imports.
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nominal GDP
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Gross domestic product measured in terms of the price level at the time of the measurement; GDP that is unadjusted for inflation.
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real GDP
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GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP
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economic growth
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(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
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Real GDP per capita
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Real output (GDP) divided by population.
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Arithmetic of growth
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70/ annual percentage rate of growth
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labor productivity
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Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.
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labor force participation rate
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The percentage of the working-age population that is actually in the labor force.
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growth accounting
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assess the relative importance of the supply-side elements that contribute to changes in real GDP. This system groups these elements into the two main categories we have just discussed:
Increases in hours of work.
Increases in labor productivity.
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infrastructure
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The capital goods usually provided by the public sector for the use of its citizens and firms (for example, highways, bridges, transit systems, wastewater treatment facilities, municipal water systems, and airports).
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human capital
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The accumulation of knowledge and skills that make a worker productive.
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economies of scale
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Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.
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productivity growth
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1. technological advances
2. increased capital
3. education and training
4. economies of scale
5. resource allocation
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information technology
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New and more efficient methods of delivering and receiving information through use of computers, fax machines, wireless phones, and the Internet.
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start-up firms
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A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.
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increasing returns
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An increase in a firm's output by a larger percentage than the percentage increase in its inputs.
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business cycles
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Recurring increases and decreases in the level of economic activity over periods of years; a cycle consists of peak, recession, trough, and expansion phases.
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recession
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A period of declining real GDP, accompanied by lower real income and higher unemployment.
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expansion
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The phase of the business cycle in which output, income, and business activity rise.
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shocks
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sudden, unexpected changes in demand (or aggregate demand) or supply (or aggregate supply).
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sticky prices
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sudden, unexpected changes in demand (or aggregate demand) or supply (or aggregate supply).
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labor force
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Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.
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frictional unemployment
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A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
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structural unemployment
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Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
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cyclical unemployment
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A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand).
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potential output
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The real output (GDP) an economy can produce when it fully employs its available resources.
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GDP gap
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Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).
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inflation
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A rise in the general level of prices in an economy.
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consumer price index (CPI)
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An index that measures the prices of a fixed “market basket” of some 300 goods and services bought by a “typical” consumer. CPI= price of most recent market basket in the particular year/ price of the same market basket in (year-year)
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deflation
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A decline in the economy's price level.
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demand-pull inflation
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Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand.
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cost-push inflation
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Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by
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nominal income
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The number of dollars received by an individual or group for supplying resources during some period of time; income that is not adjusted for inflation.
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real income
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The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation. Real income=nominal income/ price index (in hundredths)
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who is hurt by inflation?
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fixed-income receivers, creditors, savers
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who is unaffected or helped by inflation?
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flexible-income receivers and debtors
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nominal interest rate
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The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.
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real interest rate
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The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
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ECONOM 1051: EXAM 1