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INT MGL ECON EXAM 3 Flashcards

(48 cards)

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1
Q

Pure Competition Basic Requirements (4)

A
  1. Goods and Services must be Homogeneous
  2. Perfect Market Knowledge
  3. Easy Entry & Exit to/from the market
  4. No buyer or seller can outback the price
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2
Q

Types of Monopolies (4)

A
  1. Strategic Resource Monopoly
  2. Patent or copy right monopoly
  3. Natural Monopoly
  4. Legal Monopoly
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3
Q

Monopolistic Competition Basic Requirements (4)

A
  1. Perfect Market Knowledge
  2. Easy to entry/exit to/from the Market
  3. Many buyers and sellers
  4. Not homogeneous goods -> Main difference with pure competition
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4
Q

Oligopoly Definition

A

Just a few firms with identical or differentiated goods & services which have interdependency in decision making and price war or collusion (Illegal)

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5
Q

Types of Oligopolies (2)

A
  1. Identical or Pure Oligopoly

2. Differentiated Oligopoly

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6
Q

Collusion Definition

A

Formation of a cartel: an optimal solution through which firms join together to act as a monopoly and increase profits

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7
Q

Types of Cartel (2)

A
  1. Centralized Cartel

2. Market-Shared Cartel

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8
Q
  1. Centralized Cartel
A

Central Office where the firms decide the production levels of each member and their QMax Profits & Profit Quotas

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9
Q
  1. Market-Shared Cartel
A

Members divide market by region, industry or type of buyer. Example: In the US, its divided by States and by consumers, industrial, commercial & consumer. Problems arise with the allocation of production companies in different states and regions.

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10
Q

(3) Natural Forces against the Cartel

A
  1. Firm B is payed not to produced
  2. New entries of firms makes it difficult to maintain all members as part of the cartel
  3. Firms cheat and produce more to reduce the price
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11
Q

Oligopolistic Market Structure

A
  • There are substantial problems in the Long Run
  • MR<P
  • Too much resources spent on advertising and differentiation
  • Interdependency of prices
  • Game Theory
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12
Q

Game Theory Definition

A

Centers on the best or optimal choice or strategy a firms can choose in a system of conflict

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13
Q

Game Theory Model (8)

A
  1. Players
  2. Strategies
  3. Payoff
  4. Payoff Matrix
  5. Zero Sum Game
  6. Non Zero Sum Game
  7. Dominant Strategy
  8. Nash Equilibrium
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14
Q
  1. Players
A

Decision makers, who’s behavior is trying to predict others

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15
Q
  1. Strategies
A

Choices available, which have an impact in your and others profits

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16
Q
  1. Payoff
A

The outcome of all possible combinations of strategies

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17
Q
  1. Payoff Matrix
A

The table of all the possible outcomes and strategies available

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18
Q
  1. Zero Sum Game
A

The game of one player outsets at the expense of the other player

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19
Q
  1. Non Zero Sum Game
A

When the game is not at the expense of the other and doesn’t outsets any games

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20
Q
  1. Dominant Strategy
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A

When the strategy that a firm chooses is their best option no matter what the other firm chooses
-Dominant Strategy is always Nash Equilibrium

21
Q
  1. Nash Equilibrium
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A

An equilibrium where not all the players have a dominant strategy and each chooses their optimal strategy given the other firm’s decision

22
Q

Price Discrimination

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A

Charging different prices for different quantities or at different times or at different customer groups or different markets where differences are not justified by cost

23
Q

Price Discrimination Requirements (3)

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A
  1. Control over price
  2. Price elasticity of demand must be different in markets or in market quantities
  3. Resale form the cheaper to the expensive must be blocked
24
Q
  1. First Degree Price Discrimination
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A

The vendor has so much control over the market to charge each buyer the highest price they are willing to pay. Highly difficult to achieve

25
2. Second Degree Price Discrimination
You charge a uniform price for a given quantity of the good but after a certain amount you charge less
26
3. Third Degree Price Discrimination
You are at a specific location selling your g&s in two different markets in a monopoly
27
Cost Plus Pricing
- Estimates the average variable costs for producing g&s and marketing standard level of output of the firm - Traditionally, firms have 70-80% level capacity - Firms apply a markup percent (M)
28
Cost Plus Pricing Advantages (4)
1. Less information and is more precise MC=MR 2. Easy to use but can be tricky 3. Infers that prices are stable 4. Provides a justification for price increase
29
Cost Plus Pricing Criticisms (3)
1. Based on accounting/historical costs rather than opportunity cost but it's a way rather than a tool 2. Based on average cost instead of marginal cost but to the extent MC is fairly consistent AC is a good approx 3. Ignores conditions of demand- generally firms apply higher markups when the product has a elastic demand, a stronger M is related to E
30
Incremental Analysis of Price & Marginal Analysis
What the impact of pricing would be to the whole firm and what would be the correct prices that require incremental analysis.
31
They are depending on: Incremental Analysis of Price & Marginal Analysis
- Increase in TR - Increase in TC - Only if TR > TC - SR with excess of capacity, fix costs are not relevant -SR out of capacity, Quality Demand Increases - Therefore, Fix costs increases and overhead costs increases and C (fully allocated av. costs) increases -If Pa decreases, Demand Increases and because A replaces B - TR increases BUT if A complementary B in a firm the TR decreases
32
Capital Budgeting
The process of planning the stream of revenues and returns over time
33
(5) Types of investment project
1. Replacement 2. Cost Reduction 3. Expenditures to expand output 4. Produce a new gov' regulations
34
1. Replacement
Machine maintenance costs that are known. It is the easiest way that decisions can be made by the lower level
35
2. Cost Reduction
More efficient machinery acquisition that will lower your costs
36
3. Expenditures to expand output
Expansion of production facility to produce more as a result of the demand
37
4. Produce a new product
Enter a new market but this is quite complex to plan and has more risk because there is no knowledge of the market
38
5. Conform with gov' regulations
Its a complex process that engages in monitoring, evaluating and legal concerns to comply with gov' regulations, including outside investments in consulting or advising
39
Methods for projecting Net Cash Flows
1. Net Cash Flow: a good deal of uncertainty and come up on estimate guidelines 2. Evaluate whether or not you should undertake the project
40
1. Net Cash Flow: Methods
1. Incremental basis on cash flows from the project and is differences between cash flows before and after the project was taken. You include the impact on cash flows and other areas of the firm 2. Estimate the Net Cash Flow after tax rates and use the firm's marginal tax rate that project A would incur 3. Depreciation impact on taxes
41
2. Evaluation of the project: Methods
1. Net present value approach: take all the cash flows from the future and discount the present value and compare that to the capital required 2. Internal Rate of Return: the discount rate required to that the present value of all the future cash flows will exactly equal to the Cost of Capital
42
Cost of Capital: Methods to rise funds (2)
1. Issuing funds and stocks (External) 2. Retain earning (internal) - In both there are always costs
43
Cost of Debt
Return that landlords demand to lend funds to the company | Rative interest adjusted for the tax deduction
44
Cost of Equity Financing Methods (4)
1. Risk Free Rate Plus Premium 2. Dividend Evaluation Model 3. Capital Assets Pricing Model 4. Weighted Average Cost of Capital (WaCC)
45
Strategic Resource Monopoly
One firm controls the supply of a resource that is crucial for the production of goods
46
Patent or Copyright Monopoly
The gov' give the patent or copyright to the person who created to sell it
47
Natural Monopoly
The firm enjoys increasing returns to scale of production and reduce the average cost. One firm gets the entire market and no one can compete with them. Ex. Public Utilities
48
Legal Monopoly
Do not confuse with patent monopoly. The gov' gives one firm the exclusive right to produce a service or good. The firm didn't invent the item. Ex. Utilities or Cable companies

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