Final exam Flashcards
Characteristics of oligopoly
- few large firms
- differentiated or identical products
- significant entry barriers
- firms mutually interdependent
- significant control over P
- economies of scale
examples of oligopoly
automobile companies, airlines, smartphones, lawnmowers, steel, aluminum
Kinked demand curve
if p is increased, competitors will not follow suit (so will be on D2)- rivals DO NOT react
if p is lowered, competitors will also lower their P (so will be on D1) - rivals REACT
Oligopoly equilibrium
MR = MC
- MR is discontinuous
- get P only from D curve - p and output are rigid
oligopoly market
- price wars (airlines)
- collusion = illegal
- price leadership (leader / follower model)
game theory
one firm is dependent on another firm's behavior in making decisions - mutually independent - duopoly - dominant strategy - nash equilibrium Box thing
dominant strategy
the best strategy irrespective of the action of your rival
ex: spotify charge lower P of $9.99 no matter what apple does
price matrix
- price guarantee
- coupons
- price itself will be higher
monopoly characteristics
- single firm
- unique product, no close substitutes
- e < 1, steep D curve
- entry barriers (very difficult - patents, trademarks, etc.)
reasons for monopoly
- legal and government
- geographical
- control over key resources
- network externalities
- natural monopoly
monopoly equilibrium
MR= MC when P > MC: 1. resources not allocated efficiently 2. consumer exploitation 3. monopolist continues to earn supernormal profits even in long run due to entry barriers
long run profits for a monopoly
because of barriers to entry, no new firms enter, so there is NO distinction between short-run and long-run for monopoly (nothing will change in long-run)
PC vs. Monopoly
PC:
- graph
- output is higher and P is lower
- Under PC, P = MC
- no consumer exploitation; resources efficient - in long run, competitive firm gets normal profits only (due to free entry and free exit)
Monopoly:
- Graph
- output is smaller and P is higher
- P > MC
- possible exploitation, resource inefficiency - monopolist continues to get supernormal profits even in long-run due to entry barriers
natural monopoly
situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can 2 or more firms
- public utilities - essential services
SDG & E
- AC continues to fall for a considerable range of output
natural monopoly equilibrium
MR = MC
Demand for labor
different from the demand for the final goods and services because it is a derived demand (depends on d for the good the factor produces)
Marginal revenue product of labor (MRP)
change in a firm’s revenue as a result of hiring one more worker
multiply additional output produced by the product price
- curve is same as D curve for labor
Equilibrium in labor market
W = MRP
profit maximizing point
Marginal Product (MP)
addition made to total output by hiring one more worker
- a physical quantity
Backward bending supply of labor
first a normal S curve - as W increases S increases (substitution effect)
then as W increases S decreases (income effect)
Substitution effect
an increase in wage raises the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure
Income effect
because leisure is a normal good, a wage increase will cause a worker to devote less time to working and more time to leisure
absolute advantage
the ability to produce more of a good or service when using the same amount of resources (quantity)
comparative advantage
ability to produce more of a good or service at a lower opportunity cost than competitors (cost)z
