Exam 5 Flashcards
(31 cards)
Market Structures
Models of how the firms in a market interact with buyers to sell their output
Market structures in decreasing order of competitiveness
- Perfectly Competitive
- Monopolistically Competitive
- Oligopolies
- Monopolies
Price takers
A firm looks at a price in the market and sets their item to that price
Differentiated
When a product is distinctive such as its physical aspects, location where it is sold, intangible aspects, or consumers perception of the product
Perfectly Competitive Markets
1) There are many buyers and sellers
2) All firms sell identical products
3) There are no barriers to new firms entering the market
Profit= Total Revenue- Total Cost
Pi= TR -TC
Price= Average Revenue = Marginal Revenue
P= AR = MR
Average revenue= Total revenue/ Quantity
AR=TR/Q
Marginal Revenue
MR=TR/Q
Price= Total Revenue/ Quantity= Total Revenue/Quantity
P=TR/Q=TR/Q
Sunk Costs
Cots that have been paid or will be paid by obligation/contract and cannot be recovered. Even if they haven’t been paid yet the firm is still obligated to pay them such as rent
Profits, Break Even, or Losses
MC=MR Profit maximizing quantity
P> ATC firm is making profit- should continue operations
P= ATC breaks even- makes the decision to
shut down in the short run
P< ATC firm is making loss- already shut down in short run
Price Effect
When revenue decreases even though there are extra sales due to a price reduction
Output Effect
When revenue increases because of the extra sales due to a price reduction
TR>TC= Economic Profit
Total Revenue > Total Cost= Economic Profit
When more firms come in
Demand curve shifts left
Demand curve is
Flatter (more elastic) in the long run than the short run
Firms can also use advertising to differentiate their products:
Effectively making the demand curve more inelastic
Makes a firm successful
A firms ability to differentiate its product and to produce it at a lower average cost than competing firms creates value for its consumers
Four Firm Concentration Ratio
Establish a baseline for the level of competition in an industry
Why do oligopolies exist
They exist because of barriers to entry
Ownership of a key input
Ocean Spray: Cranberries
Patent
The exclusive right to a product for a period of 20 years from the date the patent is filed with the government
Game theory certain characteristics;
Rules that determine what actions are allowable
Strategies that players employ to attain
