ECON 224: Final Exam
67 Cards in this Set
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Perfect Competition
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-Many firms, no restrictions to entry/exit market
-no one firms has any advantage over another firm in the market-all sellers and all buyers are well informed about d market condition-each firm has a very small part of a very large market -all firms in this market are 'price takers' whic…
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max profit in perfect competition?
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when MC=MR and TR>TC by greatest amount
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Perfectly competitive market: Profit maximization
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occurs at total product where total revenue exceeds total cost by greatest amount and at total product where mr=mc
look graph
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Perfectly competitive market: Break Even or nominal Return
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at total product at where total revenue equals total cost and at total product where mr=mc
look graph Max ATC is at capacity
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perfectly competitive market: Loss minimization:
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occurs at total revenue where total cost exceeds total revenue by least amount and at total product where MR=MC
in this situation you should continue producing in the short run
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Perfectly competitive market: Loss minimization/shut down
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the best operating position occurs at total product where total cost exceeds total revenue by the smallest amount. whehre mc=mr
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what to look when looking at graphs of perfectly competitive market?
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worry about the intersection of the price line and MC. if this is point is over the line of ATC, you are making money. if its on the line you are break even. if its between ATC line and AVC you are loss minimization. And if its Below AVC, its not worth no keep the company so shut it down.…
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perfectly competitive market: external economies-Decreasing Cost industry
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suply and demand curve shift right but the supply curve increases more than the demand one. as a result we have a bigger quantity for a lower price
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perfectly competitive market: external dis-economies- increasing cost industry
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both curves, demand and supply shift right. demand one increases more. as a result higher price and more quantity.
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perfectly competitive market: constant cost industry
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both demand and supply curve shift right at the same rate (perfectly elastic) so the price remain the same while the quantity of product increases.
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monopoly
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a monopoly is single firm that represents the entire market in a specific geographic area at a specific time
For monopolies and any other markets besides perfect competition, the firms price and marginal revenue are not the same.
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monopoly characteristics
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-the product or service being offered is completely unique to that firm. It has no close substitute
-there are extreme entry/exit barriers in this market.- A monopoly is a price maker (establishes a price where the profit-maximizing output, where mr equals mc.-the demand curve of monopol…
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natural monopoly: natural barriers
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a monopolistic firm in this category requires such a large scale of operation that if it were not to have the entire market, it and any potential competitors would be able to cover their associated costs.
look graph
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natural monopoly: entry barriers:
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ownership of resources required for production of a given product or service.
Alcoa: pre WWII access to Bauxite which is the main component of aluminum
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Natural Monopoly: Legal barriers to entry:
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Patents and Copy Rights: public franchise: U.S post office
-Gov. licensing: controlling entry into particular occupations or professions, specially in a limited local market.Patents: usually 20yrsCopy Right: works of literary arts music and other fine arts. given exclusive rights to the…
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when on monopoly: when is most productively efficient quantity of labor
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when MP=AP
and AP is at max
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total product(output quantity)
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is the value at any specified number of laborers or labor hours.
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marginal product
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is the change in total product that occurs for the next unit of labor(the first derivative of total product with respect to labor).
MP=change TP / change labor
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avg. product
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is the amount of total product at a specified number of labor hours, divided by that number of labor hours
AP= total product/ labormaximum AP is the most productively efficient point occurs at MP=AP
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law of diminishing returns
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as a firm uses more of a variable input (labor) with a given quantity or fixed factor input (capital), the marginal product of the factor eventually decrease
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total cost
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the sum of all fixed costs and variable costs
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total fixed costs
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cost of capital and all things that remain constant in the short ru, regardless of how much is produced
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Total variable cost
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the costs of labor and all variable factors. These increase as more of the factors are used in prodcution
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ATC
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the total cost divided by total product at which the total cost occurs
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AFC
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the total fixed cost divided by the total product at fixed point
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Avg variable cost AVC
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total variable cost divided by total product at total variable cost
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marginal cost
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change in TC / change in TP
change in TC / change in MP
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Facts about costs
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-avg variable cost is minimum at the quantity of total products at which AVC=MC
-avg total cost is minimum at the quantity of total product at which ATC=MC-minimum avg variable cost will always be less than avg total cost and will occur at a smaller value of total cost
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shifts of cost curves: Technology changes
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labor becomes more efficient. Total product shifts upwards. as do marginal and AP with these changes, some cost will fall, such as TC and TVC. AVC and ATC will always fall
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Shifts of cost curves price of factors of production
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an increase in the price of a factor of production increases costs and shifts corresponding cost curves upwards. if fixed costs increases the TFC, AFC and TC curves will shift up.
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shifts of cost curves
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if variable cost increases, the TVC, TC, AVC, ATC and marginal costs will all increase and shift upward.
-switching to the long run, all factors of production(capital and labor) are permitted to vary. in this transition firms typically decide whether to enter, leave, expand or contract …
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economies of scale (increasing returns of scale)
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a firm is in this scale of operation when the total product increases by a greater percentage than the increase in all factors of production
% change in output > % change in input factors
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Constant returns to scale
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a firm is in this scale of operation when the total product increases by the same percentage as the increase in all factors of production
% change in output = % change in input factors long run cost are minimum
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Diseconomies of scale (decreasing returns to scale)
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a firm is in this scale of operation when the TP increases by a lesser % than the increase in all factors of production
%output < %in input
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Firms price and marginal revenue
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for monopoly and any other market besides perfect competition, the firms price and marginal revenue are not the same
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Marginal Revenue
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is the rate of change of total revenue, or the first derivative of total revenue. it falls more quickly than price a long the negatively sloped demand curve
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For monopoly: Total revenue is maximum..
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when MR=0
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monopoly: maximum profit occurs?
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at TP value where MR=MC. where TR>TC by the greatest amount
the intersection of MR and MC gives the the Quantity and the price for that Q will be where this Q intersects with the demand curve check graph
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Price Regulation for a natural monopoly: Regulator
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-ensures exclusive rights (ensures power)
-with MC pricing, sets price with level of service of total product where demand intersects MC-To cover the difference between MC and ATC, we will use a two tier system. + a monthly one time fee equal to the difference between MC and ATC.+ A us…
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Price regulation for a natural monopoly: Avg cost pricing
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-regulator ensures services provider of exclusive service rights
-provider must charge the price at level of total produc where demand equals avg total cost
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Price Discrimination:
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instead of using a single profit maximizing price, a price discrimination monopoly will use several prices. the objective is to capture as much consumer surplus as possible
exp: movie tickes senior children etc
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Perfect price discrimination
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extracts the entire consumer surplus at prices above and below the profit maximization
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Rent seeking
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is the act of obtaining special treatment by the government to divert consumer surplus to producer surplus and prevent other would be competitors from entering market- this process result in increases in the ATC and total cost
in extreme rent seeking average total cost is increased to th…
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Monopolistic competition
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-many firms
-each firm produces a differientiated product -firms compete on quality, price, other distinguish characteristics -firms face little exit/entry barriers-each firm has a small market share in a very large market (no collusion possible)-price is obtained from a downward sloppi…
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oligopoly
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-small number of firms compete
-substantial natural or legal barriers-each significant firm has a large market share -firms are interdependent-strategy in pricing and output goals are manipulated to the greatest extent in this market-firms may have opportunities to gain by colluding
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distinguish between monopolistic competition and oligopoly
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firm concentration ratio
0% perfectly competitive market
<40% monopolistic competition
40<100 oligopoly
100 monopoly
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herfindahl-hischman index H-H index
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square the percentage market share of each of the 50 largest firms
0 perfect competition
<1600 monopolistic
1800<10000 oligopoly
10000 monopoly
H-H.I = 25^2+50^2+60^2=
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limitation to concentration measures: geographic scope of the market:
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a monopoly or oligopoly in a small geographic area could easily be part of a great number of firms, when he geographic area is expanded to a region or nation wide.
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Limitation to concentration measures: Barriers to entry and turnover
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discounts the effects of a market at one particular time at any given time, if barriers to entry are minimal and turnovers are great, what might be a monopolistically- competitive market could move into oligopoly
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Monopolistically competitive firm in the long run:
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operating in the long run will find their best total product at normal return position. however, unlike a perfectly competitive firm, a monopolistically competitive firm will have excess capacity.
the difference between marginal cost and the profit maximizing output is called mark up
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Cartel
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in a oligopoly thee are few firms. if these firms are producing ver similar, there is great temptation for these firms to collude as a monopoly and form a cartel
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Conditions favorable to forming and maintaining a cartel
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-very small number of firms in amrket.
-each firm produces a product that is very similar for products of the other firms
-one firm will act as the coordinator
-little liklyhood of cheating
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types of oligopoly
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-duopoly- two firms (airplane manufacturing: boeing and airbus)
as a cartel each of them will produce less than its own maximizing profit quantity.
each firm will have a quota which when followed will provide a total output of all the firms in the cartel which is equivalent to waht a …
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GDP
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the total market value of all final good and services produced within a given country in a given time period
GDP= C+I+G+NX
c= household consumption of good and serv
i- gross private investment
purchase of new capital goods(includes acc depreciation)
G=Gov expenditures of good and…
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total market value
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all output TP times ther respectives prices
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Final goods and services
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Good and services intended to be consumed by the final user
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in the given country
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if it is us GDP must be produced in US
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time period of GDP
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when the product is produced yr
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nominal GDP
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value of final goods and services based on current prices
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Real GDP
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value of final good and services based on prices of some stated base year(same as nominal GDP for that year)
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consumer price index
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a measure of the avg prices paid by urban consumers for a fixed market basket of consumer goods and serv. it only includes those goods and servs most commonly consume by households.
-construct the market basket -conducting a monthly survey of prices for those things in the market basket-…
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What makes a market basket?
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housing
transportation food and beverages medical carerecreationeducation and communicationapparel other goods
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COLA
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cost of living adjustments
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CPI-U
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measures avg prices paid by all urban households. this measurment is used to address COLAs for those on fixed income. this addresses 87% of population
wages earnersclerical workersprofessional managerial tech workers self employed short term workers
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CPI W
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measures avg prices paid by wage earners and clerical workers
this measurement is used by employers and unions in adjusting wages and salaries this represents 32 % of populationlook notes
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inflation rate
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current CPI - previous / previous
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CPI formula
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current market basket/ based period CMB
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ECON 224: Final Exam