chapter 10 Flashcards by amelia webb

Q

another method that the government can use to help make a market is efficient is s subsidie

describe a subsidie ?

A

you can think of it like negative tax :

buyers pay the market price
then the government pays each seller a subsidy of $S
so that the price sellers receive is Ps

where Ps > Pd Ps = Pd + S

the subsidy basically yin creases demand or supply ( shifting ) to allow the buying and selling prices to be more ideal and promote the purchase of the good or service as it most likely has positive externalities

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Q

describe a price ceiling ?

A

a legal maximum on the price per unit that a producer can receive.

if the ceiling is below the pre control competitive equilibrium price then the ceiling is called binding

rent control is a common example peace they specify maximum prices that landlords may charge tenants

they can effect the distribution of income and economic efficiency when they hold the price of a good or service below the market price (what would be)

maximum prices can create excess demand

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Q

describe a price floor ?

A

a minimum price that consumers can legally pay for a good

sometimes referred to as price supports. if the price floor is above the pre control competitive equilibrium price it is said to be binding

for example the government have implemented minimum wage

the minimum price can crate excess supply which in some cases means unemployment

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Q

describe a production quota

A

a limit on either the number of producers allowed in market or the amount each producer is allowed to produce

the quota usually has a goal of placing a limit on the total quantity producers can supply

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Q

describe an import quota

A

IQ - a restriction on the amount of a good that can be imported into a country.

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Q

describe an import tariff ?

A

a tax is levied by the gov on a good imported into the country

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Q

for this intervention EXCISE TAX what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. falls
b. falls
c. falls
d. positive
e. yes

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Q

for this intervention SUBSIDIES TO PRODUCERS what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. rises
b. rises
c. rises
d. negative
e. yes

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Q

for this intervention MAX PRICE what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. falls (excess demand)
b. rise or fall
c. falls
d. zero
e. yes

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Q

for this intervention MIN PRICE what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. falls , excess supply
b. falls
c. rise or fall
d. zero
e. yes

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Q

for this intervention PRODUCTION QUOTA what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. falls , excess supply
b. falls
c. falls or rise
d. zero
e. yes

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Q

for this intervention EXCISE TAX what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. falls
b. falls
c. rise
d. positive
e. yes

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Q

for this intervention EXCISE TAX what is the

a. effect on Q traded
b. effect on consumer surplus
c. effect on producer surplus
d. effect on government budget
e. is dead weight loss created

A

a. falls
b. falls
c. rise
d. zero
e. yes

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Q

describe a monopoly

A

a market consisting of a single seller facing many buyers

by being a single seller. a monopolist sets the market price for its product

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Q

what stops a monopolist from setting an infinitely high price ?

A

the monopolist must take account of the market demand curve, the higher the price the less they sell

thus the monopolists market demand curve is downward sloping as well

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Q

what is marginal revenue ?

Study These Flashcards

A

the additional revenue added to the total by one more unit

MR = P + Q x changeP/changeQ

Q

where do monopolists profit maximise ?

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A

monopolists profit maximise where MR = MC

MR > MC , firm can increase Q and increase profit
MR < MC , firm can decrease Q and increase profit
MR = MC , firm cannot increase profit anymore

Q

describe average revenue ?

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A

the monopolists average revenue is the ratio of TR to Q

AR = TR/Q = P.Q/Q = P

the average revenue curve is the market demand curve

Q

what is price elasticity of demand ?

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A

the responsiveness of quantity demanded to a change in price

the more elastic a demand curve the flatter

PeD plays a very important role in determining the extent to which the monopolist can raise price above the MC

Q

what is the inverse elasticity rule ?

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A

MR = P (1+1/E) where E = changeQ/changeP . P/Q

where demand is elastic , E < -1 , MR > 0
where demand is unit elastic , E = -1 , MR = 0
where demand is inelastic , E > -1 , MR < 0

P* - MC* / P* = - 1/E

Q

what is the inverse elasticity pricing rule (IEPR)

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A

monopolists optimal markup of price above marginal cost is expressed as a percentage of price = -1/E

the more price elastic the monopolists demand is the smaller the optimal markup will be

Q

describe the elasticity of a demand curve ?

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A

the top of the curve is elastic, the middle is unitary and the end is inelastic

a monopolist will always operate on the elastic part of the curve because total revenue increases and costs decrease so profits must be rising

Q

what is market power ?

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A

when a firm can influence, through its own actions, the market price then it has market power

sometimes thesis thought of as the degree to which a firm can raise price above MC

Q

what is the lerner index of market power ?

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A

the percentage markup of price over MC is the natural measure of market power
ranges between 0 and 1 for a competitive firm, for a monopoly facing a unit elastic demand
if a monopolist faces strong competition from substitutes the lerner index can still be low. in other words, a firm might have a monopoly but its market power could still be weak

(P-MC(Q))/P* = -1/E

how do demand shifts affect monopoly equilibrium ?

whether or not the monopolies MC are neg. or pos. sloped a rightward shift in demand causes the profit maximising quantity to increase but where MC is pos. sloped, the price goes up where as neg. sloped the price goes down

what is the monopoly midpoint rule ?

when demand is linear the marginal cost is constant, profit maximising price can be determined by finding the midpoint the optimal price P* is halfway between the vertical intercept of the demand curve and vertical intercept of the MC curve

what happens to profit max Q and price when MC shifts up ?

profit max Q falls and Price rises this also decreases the profit maximising total revenue

in a multi plant monopoly what problems do the monopoly face ?

how much should they produce overall ? MR = MCT how much should they produce at each firm ? draw a line from MR = MCT and where it crosses MC1 and MC2 is how much each should produce

describe a cartel

a group of firms that collusively determine the price and output in a market their main goal is to reduce industry output in red to raise price and profits it acts as a single monopoly firm so it has the same allocation problems as a monopoly the higher the MC, the less output allocated at the profit max Q, MR = MCT

what is a natural monopoly ?

a market is a natural monopoly if for any relevant level of industry output, the TC a single firm would incur i less than the combined TCs of firms divided between them a nessercary condition is that the average cost must decrease with output over some range, must involve economies of scale status depend son technological conditions and demand conditions. may be natural when d is low but not when it is high

what are barriers to entry ? a. structural b. legal c. strategic

factors that allow one firm to benefit in a market while preventing other firms from entering a. when firms have cost or demand advantages that make entering unattractive b. legal protection against competition ( e.g. trade mark ) c. result when the firm makes explicit choices to deter competition

for a monopsony what are these ? a. max profit b. MRPL c. MEl d inverse elasticity pricing rule

a. = P.F(L) - W.L b. = P* . MPL = P(changeQ/changeL) c. = changeTC/changeL = W + L . ( changeW/changeL) d. 1 / EL,W

what is a monopsony

a market consisting of a single buyers and many sellers tends to be the labour market