Econ 101: Chapter 14

Question 1

Market structure / industrial organization

Answer 1

the competitive environment in which you’re doing business

Question 2

Market power

Answer 2

the extent to which a seller can charge a higher price without losing many sales to competing businesses.

Question 3

The higher your market power…

Answer 3

the higher the price you can charge.

Question 4

Perfect competition

Answer 4

where all businesses sell an identical good, and there are many small buyers and sellers.

Question 5

Those in a perfectly competitive market…

Answer 5

hold no market power.

Question 6

Monopoly

Answer 6

when there is only one seller in the market.

Question 7

Monopolists hold…

Answer 7

a lot of market power; they can raise the price without losing customers to their competitors.

Question 8

Oligopoly

Answer 8

a market with only a handful of large sellers.

Question 9

An oligopoly has..

Answer 9

market power, but not as much as a monopoly

Question 10

Monopolistic competition

Answer 10

a market with many small businesses competing, each selling differentiated products.

Question 11

Product differentiation

Answer 11

efforts by sellers to make their products differ from their competitors.

Question 12

You hold more market power when..

Answer 12

you have fewer competitors, and when your product is more unique.

Question 13

Imperfect competition

Answer 13

when you face at least some competitors and/or you sell products that differ at least a little from your competitors.

Question 14

Insight 1 into imperfect competition

Answer 14

more competitors leads to less market power.

Question 15

Insight 2 into imperfect competition

Answer 15

market power allows you to pursue independent pricing strategies.

Question 16

Insight 3 into imperfect competition

Answer 16

successful product differentiation gives you more market power.

Question 17

Insight 4 into imperfect competition

Answer 17

imperfect competition among buyers gives them bargaining power.

Question 18

Insight 5 into imperfect competition

Answer 18

you best choice depends on the actions that other businesses make (interdependence principle).

Question 19

when you have market power…

Answer 19

you face a trade off between selling a larger quantity of items vs. making more money on each item you sell.

Question 20

Firm demand curve

Answer 20

illustrates how the quantity that buyers demand from an individual firm or business varies as it changes the price it charges.

Question 21

Perfect competition - firm demand curve

Answer 21

flat (horizontal) firm demand curve

Question 22

Monopoly - firm demand curve

Answer 22

monopolist’s firm demand curve = market demand curve

Question 23

Imperfect competition - firm demand curve

Answer 23

Downward sloping
- Steep = inelastic = more market power
- flatter = elastic = less market power

Question 24

Ways to discover your firm’s demand curve:

Answer 24

Experiment with different prices…
- with different groups of customers.
- at different locations
- over time

Question 25

Marginal revenue

Answer 25

the additional total revenue you get from selling one more unit.

Question 26

Marginal revenue reflects...

Answer 26

the output effect − discount effect

Question 27

Output effect

Answer 27

An extra unit of output will boost revenue by an amount equal to the price of the extra item sold, P.

Question 28

Discount effect

Answer 28

to sell one extra unit, you must lower your price on all previous units sold. (∆PxQ)

Question 29

Marginal revenue curve lies below the firm demand curve because...

Answer 29

of the discount effect.

Question 30

the distance between the marginal revenue curve and the firm demand curve is...

Answer 30

the amount of the discount effect.

Question 31

Rational Rule for Sellers

Answer 31

sell one more item if the marginal revenue is greater than (or equal to) marginal cost.

Question 32

Follow the Rational Rule for Sellers to...

Answer 32

maximize profit

Question 33

The quantity you should sell is where...

Answer 33

marginal revenue curve and marginal cost curve intersect.

Question 34

The price you should charge is...

Answer 34

the price on the firm demand curve, above the marginal revenue curve.

Question 35

Patent

Answer 35

gives you the right to be the only seller of the good you invent for a period of time

Question 36

Patents effectively make companies...

Answer 36

monopolists --> market power is used to charge high prices.

Question 37

In a perfectly competitive market, what is the quantity and price?

Answer 37

Where the firm demand curve and marginal cost curve intersect.

Question 38

(1) Market power leads to...

Answer 38

higher prices

Question 39

(2) Market power leads to...

Answer 39

an inefficiently smaller quantity

Question 40

at the market power outcome...

Answer 40

the marginal benefit of more of the product is higher than the marginal cost.

Question 41

Underproduction problem

Answer 41

businesses with market power supply less than the efficient quantity

Question 42

The discount effect leads managers to...

Answer 42

supply less.

Question 43

(3) Market power yields...

Answer 43

larger economic profits.

Question 44

(4) Businesses with market power can...

Answer 44

survive even with inefficiently high costs.

Question 45

Market power creates a...

Answer 45

market failure (underproduction -- less is produced than is in society's best interest)

Question 46

Competition policy

Answer 46

laws and regulations designed to ensure that markets remain competitive.

Question 47

Competition policy is also known as...

Answer 47

anti trust policy

Question 48

Collusion

Answer 48

an agreement to limit competition --> creates market power

Question 49

Mergers

Answer 49

can create cost savings that benefit society, but also yields market power that harms society.

Question 50

Monopoly vs. monopolizing

Answer 50

being a monopoly is legal. Monopolizing a market is illegal.

Question 51

Monopolizing a market includes...

Answer 51

excluding competitors or preventing new competitors from entering.

Question 52

Predatory pricing

Answer 52

charging a price so low to force you out of business, with the goal of raising prices later.

Question 53

Price ceilings are...

Answer 53

implemented by government to limit the extent to which monopolies exploit their market power.

Question 54

Set the price ceiling equal to...

Answer 54

marginal cost --> solves the underproduction problem --> businesses with market power will produce the perfectly competitive quantity.

Question 55

In perfectly competitive markets, price ceilings

Answer 55

reduce economic surplus

Question 56

In imperfectly competitive markets, price ceilings

Answer 56

raise economic surplus

Question 57

Natural monopoly

Answer 57

a market in which it is cheapest for a single business to service the market.

Question 58

Natural monoplies occur when...

Answer 58

marginal costs continuously decrease as you expand your output.

Question 59

Governments can prevent natural monopolies from exploiting market power through...

Answer 59

pricing ceiling -- setting their price equal to the marginal cost. However, price would only cover marginal cost of last item produced.

Question 60

(Natural monopoly) Governments end up..

Answer 60

providing these services directly, and pay for any losses out of its tax revenue.