eco105 7-8

Question 1

Depreciation

Answer 1

the decrease in value of equipment over time because of wear and tear and because it becomes obsolete

Question 2

Obvious costs

Answer 2

also known as explicit costs, they are plain to see

Question 3

Implicit costs

Answer 3

hidden opportunity costs of what a business owner could earn elsewhere with time and money invested

Question 4

Accounting profits

Answer 4

Revenues - obvious costs (including depreciation)

Question 5

Risk-loving

Answer 5

gamblers, might not require much risk compensation to go for the uncertain investment as long as the returns are just a bit higher than the guaranteed return

Question 6

Risk-averse

Answer 6

more cautious, it would take a very high risk compensation to get you to go for the uncertain investment over the guaranteed bank investment

Question 7

Normal Profits

Answer 7

compensation for the use of a business owner’s time and money, the sum of the hidden opportunity costs

Question 8

time component of normal profits

Answer 8

the value of the best alternative use of the owner’s time

Question 9

money component of normal profits

Answer 9

the best alternative return on investment, including risk compensation

Question 10

Economic profits. =

Answer 10

revenues - (obvious costs + normal profits)

Question 11

Economics losses

Answer 11

negative economic profits

Question 12

Breakeven point

Answer 12

business just earning normal profits, no economic profits or losses

Question 13

Short-Run Market Equilibrium

Answer 13

term used to describe a market where quantity demanded equals quantity supplied

Question 14

When there are economic losses,

Answer 14

prices are not covering all of the business’s opportunity costs of production; consumers don’t value the product/service enough to pay the price that covers all business costs, including normal profits

Question 15

When businesses exit the industry,

Answer 15

supply decreases, moving the market price up along the unchanged demand curve; businesses keep exiting, supply keeps decreasing, prices keep rising, and losses keep decreasing

Question 16

Long-Run Market Equilibrium

Answer 16

term used to describe an industry where businesses have 0 economic profits; quantity demanded equals quantity supplied, economic profits are 0, no tendency for change

Question 17

As new businesses enter the industry,

Answer 17

supply increases

Question 18

Monopoly

Answer 18

Only seller of a product or service; no substitutes available

Question 19

Market power

Answer 19

business’s ability to set prices; A monopoly has maximum power to set prices

Question 20

Price maker

Answer 20

Pure monopoly with maximum power to set prices

Question 21

The price maker’s goal

Answer 21

to find the price and quantity combination that yields the greatest profits

Question 22

demand curve for a monopoly

Answer 22

steep and inelastic because there are no close substitutes

Question 23

Perfect competition

Answer 23

many sellers producing identical products or services

Question 24

Price taker

Answer 24

business with zero power to set prices; Profits are limited to normal profits

Question 25

The best any business in perfect competition can hope for is to

Answer 25

recover all their opportunity costs of production, including normal profits → economic profits are 0

Question 26

why does perfect competition have Perfectly Elastic Demand

Answer 26

* no matter how much you supply, the market will demand it * you will find buyers for any quantity you can produce, and you don’t have to lower your prices to sell more

Question 27

Market structure

Answer 27

characteristics that affect competition and pricing power

Question 28

main characteristics that affect competition and pricing power

Answer 28

available substitutes, number of competitors, barriers to entry of new competitors

Question 29

Available substitutes

Answer 29

How we define a market depends on how we define a particular product or service The more broadly we define a market the more substitutes there are, and the more competitors there are → less pricing power The more narrowly a market is defined, the fewer substitutes and competitors → more pricing power

Question 30

Number of Competitors: pricing power

Answer 30

The fewer competitors, the more pricing power The more competitors, the less pricing power

Question 31

Impact on number of competitors caused by technology

Answer 31

Can be good as it allows for businesses to extend their market, selling services anywhere in the world consequently increasing sales Can be bad as companies around the world can compete, which limits pricing power For consumers, the internet’s explosion of competition is good → more choices and lower prices

Question 32

Barriers to entry

Answer 32

legal/economic barriers preventing new competitors from entering a market

Question 33

Legal barriers to entry

Answer 33

governments keep new competitors out of a market by passing laws, giving a business the exclusive right to supply a product/service

Question 34

Patents

Answer 34

exclusive right to the inventor to supply his new product/service

Question 35

Copyright

Answer 35

exclusive rights to creator of a literary, musical, dramatic, or artistic work

Question 36

Average total cost

Answer 36

total cost per unit of output Average total cost decreases as the business produces larger quantities of output

Question 37

Economics of scale

Answer 37

average total costs of producing decreases as quantity (scale) of production increases If a big business is already supplying most of a market, a new competitor trying to enter will start will lower sales and therefore higher average total cost → new business can’t compete on price

Question 38

Product differentiation

Answer 38

attempt to distinguish product/service from those of competitors → fewer substitutes, more pricing power

Question 39

Higher pricing power with inelastic demand

Answer 39

Businesses with the highest pricing power tend to have the most inelastic demand With fewer substitutes, consumers have less choice and are in a weaker bargaining position Businesses have more market power to be able to raise prices and still keep selling

Question 40

Low pricing power with elastic demand

Answer 40

businesses with the lowest pricing power tend to have the most elastic demand With more substitutes, consumers have more choice and are in a stronger bargaining position → businesses gave no power to raise prices With perfect substitution there is no product differentiation or brand loyalty, so the demand for every supplier’s particular product is perfectly elastic

Question 41

The higher the pricing power, the more ___ demand is; the lower the pricing power, the more ___ demand is

Answer 41

inelastic, elastic

Question 42

Oligopoly

Answer 42

a market structure with a few big businesses that control most of the market

Question 43

In an oligopoly with available substitutes, demand is more ____ than for monopoly, but more ___ than perfect competition

Answer 43

elastic, inelastic

Question 44

Why are there barriers to entry in an oligopolistic market

Answer 44

Sellers are usually big, with economies of scale that make it hard for new competitors to enter

Question 45

Monopolistic Competition

Answer 45

Many small businesses make similar but slightly differentiated products/services

Question 46

Are there any barriers to entry in monopolistic competition

Answer 46

There are no barriers to entry, so the only hope for economic profits comes from the product differentiation that gives each business some slight pricing power or from producing at lower cost

Question 47

What do businesses do to compete

Answer 47

1. Cut costs 2. improve quality and product innovation 3. Build barriers to entry

Question 48

What does competitive pressure do

Answer 48

Causes the matching of competitor’s actions usually means matching price cuts on existing products/services

Question 49

Creative destruction

Answer 49

competitive business innovations generate economic profits for winners, improve living standards for all, but destroy less productive or less desirable products and production methods