Firm Behavior and Organization of Industry Flashcards
(120 cards)
1
Q
Are monopolies price takers or price makers?
A
Price Makers
2
Q
(True or False) A product from a monopolistic firm has close substitutes
A
False
3
Q
What two things does a firm need to be considered a monopoly?
A
Sole seller of product and said product does not have any close substitutes
4
Q
What causes a monopoly?
A
Barriers to entry
5
Q
Three sources of barriers to entry in a monopoly
A
ownership of key resources, government-given exclusivity, cost of production make a single producer more efficient than most producers
6
Q
(True or false) Monopolies often arise from exclusive ownership of key resources
A
False, it’s a potential source of monopoly, but it is rarely a cause
7
Q
How do governments create monopolies?
A
Through the use of patent and copyright laws
8
Q
What is a natural monopoly?
A
A single firm can supply a good or service to an entire market at a smaller cost than two or more firms
9
Q
When do natural monopolies arise?
A
When there are economies of scale over the relevant output
10
Q
Monopolies vs. Competition
A
Monopoly
- Is the sole producer
- Faces a downward-sloping demand curve
- Is a price maker
- Reduces price to increase sales
Competitive Firm
- Is one of many producers
- Faces a horizontal demand curve
- Is a price taker
- Sells as much or as little at same price
11
Q
Shape of monopoly demand curve
A
Downward sloping
12
Q
How does a monopoly increase sales
A
Reduces the price
13
Q
What is the formula for a monopoly’s total revenue?
A
P * Q = TR
14
Q
What is the formula for a monopoly’s average revenue?
A
TR/Q = AR = P = D
15
Q
What is the formula for marginal revenue of a monopoly?
A
dTR/dQ = MR = (1/2)D
16
Q
When a monopoly increases the amount it sells what are the two effects on total revenue?
A
◦ The output effect—more output is sold, so Q is higher.
◦ The price effect—price falls, so P is lower.
17
Q
Monopoly profit maximization
A
A monopoly maximises profit by producing where MC = MR, and charges using the price from the demand curve at that quantity
18
Q
Monopoly price formula
A
P > MR = MC
19
Q
Competitive Firm price formula
A
P = MR = MC
20
Q
Monopoly profit formula
A
Profit = (P - ATC) * Q
21
Q
When will a monopoly receive economic profits?
A
P > ATC
22
Q
Welfare Cost of Monopoly
A
Because a monopoly charges a higher price than the marginal cost, the high price is undesirable for consumers but desireable for the owner of the firm
23
Q
Explain monopoly deadweight loss
A
Since the price is above the marginal cost, it places a wedge between a consumer’s willingness to pay and the producer’s cost, causing the quantity sold to fall below the social optimum
24
Q
The inefficiency of monopoly
A
Monopolies produce less than the socially efficient quantity of output
25
Difference between the deadweight loss caused by monopoly and the deadweight loss caused by a tax
The government gets the revenue from a tax, and a private firm gets the monopoly profit
26
What are the four ways a government responds to a monopoly?
Increase competition in monopolized industries, regulate the behavior of monopolies, turn private monopolies into public enterprises, and do nothing
27
How does a government increase competition with antitrust laws?
◦ They allow the government to prevent mergers.
◦ They allow the government to break up companies.
◦ They prevent companies from performing activities that make markets less competitive.
28
Two Important Anti-Trust Laws
Sherman Antitrust Act (1890)
Clayton Act (1914)
29
Sherman Antitrust Act (1890)
Reduced the market power of the large and powerful “trusts” of that time period.
30
Clayton Act (1914)
Strengthened the government’s powers and authorized private lawsuits.
31
How can the government regulate monopolies?
The government may regulate the prices as the allocation of resources will be efficient if the price is set to equal marginal cost.
32
In practice, regulators will allow monopolists to keep some of the benefits from lower costs in the form of higher profit (True or false)
True
33
What is price discrimination?
The business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
34
When is price discrimination not possible
When a good is sold in a competitive market, since there are many firms all selling at the market price.
35
What does a firm need to price discriminate?
Market power
36
Two important effects of price discrimination
◦ It can increase the monopolist’s profits.
◦ It can reduce deadweight loss.
37
Examples of price discrimination
Movie tickets
◦ Airline prices
◦ Discount coupons
◦ Financial aid
◦ Quantity discounts
38
How prevalent are the problems of monopolies?
- Monopolies are common.
- Most firms have some control over their prices because of differentiated products.
- Firms with substantial monopoly power are rare.
- Few goods are truly unique.
39
What is total revenue?
The amount a firm receives from the sale of goods and
services
40
What is total cost?
The amount a firm spends in order to produce those goods
and services
41
Formula for profit(or loss)
Profit (or loss) = TR - TC
42
When do profits occur in a firm?
TR > TC
43
When do losses occur in a firm?
TR < TC
44
Definition of explicit costs
Tangible expenses, bills that the owner must pay
45
Examples of explicit costs
Wages, insurance, food ingredients
46
What are implicit costs?
opportunity costs of doing business
47
Examples of implicit costs
The opportunity cost of capital
Opportunity cost of owner’s time above salary paid
48
Accounting Profit definition
Does not take into account implicit costs of doing business
49
Accounting profit equation
Accounting Profit = Revenues – Explicit Costs
50
Economic Profit definition
Considers “All Costs” = (Explicit Costs + Implicit Costs)
51
Economic profit equation
Economic Profit = Revenues – All Costs
52
What is the definition of input?
Resources used in the production process. Also called factors
of production.
53
What are the inputs in production?
Labor (L), Capital (K), and sometimes materials (M)
54
Definition of output
The product that the firm creates
55
What is the production function?
The relationship between inputs and outputs
56
Production function mathematically
Q = f (K, L)
57
Marginal Product
Change in output divided by the change in input
58
Marginal Product of Labor(MPL) mathematically
MPL = dQ/dL
59
Marginal Product of Capital(MPK) Mathematically
MPK = dQ/dK
60
Diminimshing marginal products
At first, when only a few workers are hired, they have easy access to
equipment the marginal product increases. As the number of workers increases, additional workers must share equipment, and eventually, the more workers are hired, each additional worker contributes less to total production.
61
What are the costs in the short run
Variable costs and fixed cost
62
Definition of variable costs
Costs that are directly related with the rate of output
63
Examples of variable costs
Worker wages, electric bill, food ingredients
64
Definition of fixed costs
Costs that do not vary with output
◦ Costs that exist even if output is zero
65
Examples of fixed costs
Building rent, insurance
66
The formula for total costs in the short run
Total Costs = Fixed Costs + Variable Costs
67
Definition of average total costs
Total cost divided by the number of units produced
◦ “cost per unit”
68
Definition of Marginal Cost (MC)
The increase in total cost that occurs from producing
additional output
◦ Change in total cost divided by change in output
69
Relationship between average and margin
Average follows the margin
70
If the margin is above the average...
The average will increase
71
If the margin is below the average
The average will decrease
72
Why are the short run cost curves, including the ATC, AVC, and MC, U-shaped?
Diminishing marginal product!
73
Bob runs a small family restaurant. How would
you describe the monthly rent he pays on the
building?
Explicit cost, fixed cost
74
Total output with seven workers is Q = 70. Total output with eight workers is Q = 82.What is the marginal product of the eighth worker?
12
75
Characteristics of a competitive market
◦ There are many buyers and sellers in the market.
◦ The goods offered by the various sellers are largely the same.
◦ Firms can freely enter or exit the market.
76
Are firms in a competitive market price takers or makers?
Price makers
77
Formula for Total Revenue
TR = (P * Q)
78
What does average revenue tell us?
Tells how much revenue a firm receives for the typical unit sold.
79
Formula for Average Revenue
Average Revenue = Total Revenue/Quantity
80
Average Revenue does NOT equal price in perfect competition
True
81
Marginal Revenue
The change in revenue for an additional unit sold
82
Formula for marginal revenue
MR = dTR/dTQ
83
True or false, marginal revenue equals the price of the good
True
84
Profit maximization in a competitive market
Marginal Cost = Marginal Revenue
85
When MR > MC, what should a firm in a competitive market do?
Increase Q
86
When MR < MC, what should a competitive firm do?
Decrease Q
87
What MR = MC mean for a competitive firm
Profit is maximized
88
What is shut down?
A shutdown refers to a short-run decision not to produce anything during a specific period of
time because of current market conditions
89
What is an exit?
Exit refers to a long-run decision to leave the market.
90
A firm can shut down in the long term
False
91
A firm can exit in the long term
True
92
What are sunk costs?
◦ Sunk costs are costs that have already been committed and cannot be recovered.
93
When should a firm shut down?
The firm shuts down if the revenue it gets from producing is less than the variable cost of
production
94
How can well a firm be shut down by the price?
P < AVC
95
What part of a competitive firm's short-run supply curve shows when a firm will shut down?
The portion of the marginal-cost curve that lies above average variable cost
96
When should a firm exit the market?
In the long run, the firm exits if the revenue it would get from producing is less than its total cost.
97
How can you tell if a firm will exit the market in the long term based on the price?
Exit if P < ATC
98
When will a firm enter the market?
A firm will enter the industry if such an action would be profitable.
99
How can you tell if a firm will enter the market in the long term based on the price?
P > ATC
100
What is the competitive firm's long term supply curve?
he competitive firm’s long-run supply curve long-run supply curve is the portion of its marginal-cost curve that lies
above average total cost.
101
Short-Run Supply Curve
The portion of its marginal cost curve that lies above average variable cost.
102
Long-Run Supply Curve
The marginal cost curve above the minimum point of its average total cost curve.
103
What is market supply?
Market supply equals the sum of the quantities supplied by the individual firms in the market.
104
Definition of imperfect competition
Market that has some elements of monopoly that allows produces or consumers to exercise some control over market prices
105
What economic market structure do most industries fall under in the real world?
Imperfect competition
106
Definition of Oligopoly
Market with only a few seller
107
Constant returns to scale
When an increase in input results in a proportional increase in output
108
Economies of scale
When long-run average total cost declines as output increases
109
Diseconomies of scale
When long-run average total cost rises as output increases, there are said to be
110
Constant returns to scales
When long-run aver-
age total cost does not vary with the level of output
111
Cause of economies of scale
Higher production levels allow specialization among workers,
which permits each worker to become better at a specific task.
112
Cause of diseconomies of scale
Arise because of coordination problems that are inherent in any large organization.
113
What causes the U-shape of the ATC graph in the short-term
Law of Diminishing Product of Labor
114
What causes the U-shape of the ATC graph in the long-term
The Three Scales, Economies of Scales, Return to Scales, diseconomies of scales
115
Positive statement
A claim that can be tested
116
Normative statement
An opinion, of how things should be
117
10 Principles of Economics
TCMIT (Tradeoffs, Cost, Magin, Incentive, Trade)
MGPIT (Markets, Government, Productivity. Inflation, Tradeoff(between inflation and unemployment))
Principle 1: People Face Trade-offs
Principle 2: The Cost of Something Is What You Give Up to Get It
Principle 3: Rational People Think at the Margin
Principle 4: People Respond to Incentives
Principle 5: Trade Can Make Everyone Better Off
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Principle 7: Governments Can Sometimes Improve Market Outcomes
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Principle 9: Prices Rise When the Government Prints Too Much Money
Principle 10: Society Faces a Short-Run Trade-off Between Inflation and Unemployment
118
Comparative Advantage
An individual produces stuff at a lower opportunity cost than a competitor
119
Absolute advantage
Produces more than a competitor in general
120
