FINAL EXAM STUDY GUIDE PART 2 Flashcards
(51 cards)
Monopolistic competition characteristics
Relatively large number of sellers, Differentiated products, easy entry and exit from the industry
Non price competition
competition based on distinguishing one’s product by means of product differentiation and then advertising the distinguished product to consumers
Product differentiation
A strategy in which one firm’s product is distinguished from competing products by means of it’s design, related services, quality, location, or other attributes
The demand curve for monopolistic competition
Is highly elastic and down sloping
The MR curve for monopolistic competition
Lies below the demand curve and is also down sloping
A monopolistically competitive seller
maximizes profit at the level of output where MR=MC
Profit formula
ATC x Quantity=Profit
In pure competition and monopolistic competition
There is only a normal profit in the long run meaning there are zero economic profit in the long run for pure and monopolistic competition
Advantages of monopolistic competition
Are product variety and product improvement that accompany the drive to maintain economic profit
Oligopoly characteristics
A few large producers, homogenous products, control over price limited by mutual interdependence, significant entry barriers
Mutual interdependence
unique to oligopolies
Oligopolies examples
Automobiles, household appliances, soft drinks
4 firm concentration ration
sales percentage of the 4 largest firms in an industry: output of the 4 largest firms divided by the total output in the industry
Herfindahl index
The sum of the squared percentage market shares of all firms in the industry
What is the Herfindahl index for a pure monopoly?
100 squared=100x100=10,000
Kinked-demand curve
rival firms will match a price decrease and ignore a price increase
Why do oligopolies collude?
The answer is to maximize profits
Cartel
a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge
Why are cartels hard to maintain?
demand and cost differences, number of firms, cheating, recession, potential entry, and legal obstacles
What happens when there is a breakdown in price leadership?
A price war
What are the arguments for advertising?
Arguments for advertising include it provides needed information at low cost saving consumers time and money, diminishes monopoly power, promotes tech progress with new products, results in greater economic efficiency, and can reduce long run average total cost by enabling firms to obtain economies of scale
Arguments against advertising include
Include consumer manipulation brand name loyalty, leads to monopoly power, a barrier to entry, can be self canceling, and results in economic inefficiency
Why is resource pricing important?
Money income determination, cost minimization, resource allocation, and policy issues
Marginal revenue product
the change in total revenue resulting from the use of each additional unit of a resource
