Unit 4 Microeconomics

question

Imperfectly Competitive Firms

answer

monopolistic competition, oligopoly, monopoly

question

Price-Makers

answer

the power to influence the price it charges

question

All imperfectly competitive firms exert some level of

answer

control over price, determined by the type of product they sell or the amount of competition

question

Price-making firms face a -- x -- sloping demand curve

answer

downward-sloping demand curve

question

price-making firms must do what to increase demand

answer

must decrease their price to increase demand

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Demand curve equals

answer

= Average Revenue = Price

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Demand curve is >=< MR

answer

> MR

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Allocative Efficiency

answer

producing at the quantity that produces the largest possible economic surplus. price of a good should equal the value of the land, labor, and capital used to produce it

question

Allocative efficiency (graph)

answer

Graphically, it is the quantity where price equals marginal cost. (P=MC)

question

Imperfectly competitive firms are not...

answer

allocatively/productively efficient

question

Productive Efficiency

answer

producing at the quantity of output with the lowest possible cost.

question

Productive Effeciency (graph)

answer

Graphically, it is the quantity associated with the minimum of the average total cost curve. (Q produced at the minimum of ATC)(P = min ATC)

question

Imperfect competition is inefficient because... (2)

answer

Barriers to entry means competition is inherently limited, Price control (bc of differentiated products) means firms determine their own price

question

Price Discrimination

answer

Tactic to increase profits

question

Price Discrimination 3 conditions

answer

the firm must have market power (price-maker), the firm must be able to recognize differences in demand (differentiate between price inelastic and elastic consumers), and the firm must have the ability to prevent arbitration or resale of the product

question

Price discrimination typically does what to output moving the firm towards what

answer

increases output, moving the firm towards productive and allocative efficiency

question

Who is harmed by perfect price discrimination?

answer

consumers, because they achieve no surplus

question

Perfect Price Discrimination

answer

firms charge each customer the maximum they can pay; best profit opportunity

question

Perfect Price Discrimination (graph)

answer

there is a downward-sloping market demand curve but P = MR

question

Perfect Price Discrimination leads to a monopoly that is

answer

is allocatively efficient

question

Monoplies

answer

price-makers, unique products, significant barriers to entry, hidden or secret information, the only firm in the market, profit-maximizers

question

MR < D soo...

answer

P > MR

question

If MR is positive, TR is

answer

increasing

question

If MR is negative, TR is

answer

decreasing

question

If MR is zero, TR is

answer

maximized

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If MR is positive, the D curve is

answer

elastic at that quantity

question

If MR is negative, the D curve is

answer

inelastic at that quantity

question

If MR is zero, the D curve is

answer

unit elastic at that quantity

question

Natural Monopoly

answer

experience economies of scale, when the firm gets larger long-run ATC decreases; eventually diseconomies of scale occurs

question

AFCs are very high, not easy to enter the industry

answer

...

question

Geographic Monopoly

answer

occur when there is only one company that offers a particular good or service in an area

question

At what price and quantity does a profit-maximizing firm earn 0 economic profit

answer

P = ATC

question

Monopolistic Competition

answer

advertising makes demand less elastic, market power through product differentiation, deadweight loss, D>MR, key weakness is excess capacity, allocative and productively inefficient

question

Excess Capacity

answer

the difference between the quantity where MC=MR and ATC is at its lowest (productive efficiency); price of differentiation

question

Deadweight loss

answer

area between quantity produced at and MC curve

question

Consumer surplus

answer

area above price sold at and demand curve

question

Producer surplus

answer

area below price sold at and supply curve (MC)

question

Monopolistically competitive firms will earn zero economic profit in the long run because

answer

there are low barriers to entry

question

Monopolistically competitive, The entry of firms decreases

answer

demand for the product of already existing firms, causing demand for their products to shift left

question

Monopolistically competitive, the increase in substitutes will

answer

also make existing firms' demand curves more elastic

question

Elastic demand

answer

means there is a substantial change in quantity demanded when another economic factor changes

question

inelastic demand

answer

the change in quantity demanded due to a change in price is small

question

Cartel (overt collusion)

answer

members openly join and collude to restrict output and gain monopoly prices; mostly illegal

question

Tacit Collusion and Price Leadership

answer

unspoken understanding that firms will act together; difficult to prove

question

Strategic Choice/Game Theory

answer

because of interdependence, companies must take the possible response of other companies into account when planning a course of action

question

Stable pricing over time

answer

when firms are implicitly cooperative and act over the long-term, not short-term

question

Dominant Strategy

answer

a choice that maximizes satisfaction regardless of the other's action

question

Nash Equilibrium

answer

outcome where each has made the best decision possible, given the actions of the other

question

Dominant Strategy Equilibrium

answer

equilibrium result from each player following their dominant strategy

question

Payoff

answer

outcome of a strategic decision (usually a money payment)

question

Best Outcome

answer

combination of strategies that yeilds the highest joint profit

question

Government can influence a game by

answer

charging taxes or subsidies

question

Oligopoly

answer

Few large producers, Product may be standard or differentiated, Price makers, High barriers to entry, Interdependence among firms, Inflexible pricing

question

Oliogopoly four largest firms control

answer

40% of the market

1 of 54

question

Imperfectly Competitive Firms

answer

monopolistic competition, oligopoly, monopoly

question

Price-Makers

answer

the power to influence the price it charges

question

All imperfectly competitive firms exert some level of

answer

control over price, determined by the type of product they sell or the amount of competition

question

Price-making firms face a -- x -- sloping demand curve

answer

downward-sloping demand curve

question

price-making firms must do what to increase demand

answer

must decrease their price to increase demand

question

Demand curve equals

answer

= Average Revenue = Price

question

Demand curve is >=< MR

answer

> MR

question

Allocative Efficiency

answer

producing at the quantity that produces the largest possible economic surplus. price of a good should equal the value of the land, labor, and capital used to produce it

question

Allocative efficiency (graph)

answer

Graphically, it is the quantity where price equals marginal cost. (P=MC)

question

Imperfectly competitive firms are not...

answer

allocatively/productively efficient

question

Productive Efficiency

answer

producing at the quantity of output with the lowest possible cost.

question

Productive Effeciency (graph)

answer

Graphically, it is the quantity associated with the minimum of the average total cost curve. (Q produced at the minimum of ATC)(P = min ATC)

question

Imperfect competition is inefficient because... (2)

answer

Barriers to entry means competition is inherently limited, Price control (bc of differentiated products) means firms determine their own price

question

Price Discrimination

answer

Tactic to increase profits

question

Price Discrimination 3 conditions

answer

question

Price discrimination typically does what to output moving the firm towards what

answer

increases output, moving the firm towards productive and allocative efficiency

question

Who is harmed by perfect price discrimination?

answer

consumers, because they achieve no surplus

question

Perfect Price Discrimination

answer

firms charge each customer the maximum they can pay; best profit opportunity

question

Perfect Price Discrimination (graph)

answer

there is a downward-sloping market demand curve but P = MR

question

Perfect Price Discrimination leads to a monopoly that is

answer

is allocatively efficient

question

Monoplies

answer

price-makers, unique products, significant barriers to entry, hidden or secret information, the only firm in the market, profit-maximizers

question

MR < D soo...

answer

P > MR

question

If MR is positive, TR is

answer

increasing

question

If MR is negative, TR is

answer

decreasing

question

If MR is zero, TR is

answer

maximized

question

If MR is positive, the D curve is

answer

elastic at that quantity

question

If MR is negative, the D curve is

answer

inelastic at that quantity

question

If MR is zero, the D curve is

answer

unit elastic at that quantity

question

Natural Monopoly

answer

experience economies of scale, when the firm gets larger long-run ATC decreases; eventually diseconomies of scale occurs

question

AFCs are very high, not easy to enter the industry

answer

...

question

Geographic Monopoly

answer

occur when there is only one company that offers a particular good or service in an area

question

At what price and quantity does a profit-maximizing firm earn 0 economic profit

answer

P = ATC

question

Monopolistic Competition

answer

advertising makes demand less elastic, market power through product differentiation, deadweight loss, D>MR, key weakness is excess capacity, allocative and productively inefficient

question

Excess Capacity

answer

the difference between the quantity where MC=MR and ATC is at its lowest (productive efficiency); price of differentiation

question

Deadweight loss

answer

area between quantity produced at and MC curve

question

Consumer surplus

answer

area above price sold at and demand curve

question

Producer surplus

answer

area below price sold at and supply curve (MC)

question

Monopolistically competitive firms will earn zero economic profit in the long run because

answer

there are low barriers to entry

question

Monopolistically competitive, The entry of firms decreases

answer

demand for the product of already existing firms, causing demand for their products to shift left

question

Monopolistically competitive, the increase in substitutes will

answer

also make existing firms' demand curves more elastic

question

Elastic demand

answer

means there is a substantial change in quantity demanded when another economic factor changes

question

inelastic demand

answer

the change in quantity demanded due to a change in price is small

question

Cartel (overt collusion)

answer

members openly join and collude to restrict output and gain monopoly prices; mostly illegal

question

Tacit Collusion and Price Leadership

answer

unspoken understanding that firms will act together; difficult to prove

question

Strategic Choice/Game Theory

answer

because of interdependence, companies must take the possible response of other companies into account when planning a course of action

question

Stable pricing over time

answer

when firms are implicitly cooperative and act over the long-term, not short-term

question

Dominant Strategy

answer

a choice that maximizes satisfaction regardless of the other's action

question

Nash Equilibrium

answer

outcome where each has made the best decision possible, given the actions of the other

question

Dominant Strategy Equilibrium

answer

equilibrium result from each player following their dominant strategy

question

Payoff

answer

outcome of a strategic decision (usually a money payment)

question

Best Outcome

answer

combination of strategies that yeilds the highest joint profit

question

Government can influence a game by

answer

charging taxes or subsidies

question

Oligopoly

answer

Few large producers, Product may be standard or differentiated, Price makers, High barriers to entry, Interdependence among firms, Inflexible pricing

question

Oliogopoly four largest firms control

answer

40% of the market

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Unit 4 Microeconomics

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