Market Structure Flashcards
<p>How do economists determine types of markets?</p>
<p>based on the existence of substitutes</p>
<p>What are the types of markets?</p>
<p>Monopoly, oligopoly, monopolistic competition, perfect competition</p>
<p>What is oligopoly?</p>
<p>A handful of companies with close substitutes</p>
<p>What is monopolistic competition?</p>
<p>Non identical but similar products
| e.g. clothes</p>
<p>What is a firm?</p>
<p>An entity or orginisation that is responsible of G + S for maximisng profit. </p>
<p>What is an industry?</p>
<p>Many firms producing the same product, they might compete against each other.</p>
<p>What are the types of ownerships of firms?</p>
<p>1. Sole ownership
2. Partnership
3. Corporation</p>
<p>How do corporations measure capital?</p>
<p>Stocks</p>
<p>What types of partnerships are there?</p>
<p>Limited
| Unlimited</p>
<p>What is a limited partnership?</p>
<p>People cannot go after your own wealth</p>
<p>What is an unlimited partnership?</p>
<p>People can't go after your own wealth</p>
<p>What is the difference between limited and unlimited?</p>
<p>If you are unlimited it is easier to borrow from the bank</p>
<p>What is profit from stocks called?</p>
<p>Dividends</p>
<p>What are the two types of stocks?</p>
<p>Voting power and non voting power</p>
<p>Why do people buy stocks?</p>
<p>1. Profit</p>
<p>2. Equity</p>
<p>3. Value</p>
<p>What are firms?</p>
<p>legal units of production</p>
<p>What is a multinational company?</p>
<p>A company that produces in more than one country</p>
<p>What is an industry?</p>
<p>All the companies that produce a similar product </p>
<p>What decisions do firms have to make?</p>
<p>1. What industry to enter
2. Method of organisation (method of production).
3. Quantity and Price
</p>
<p>How does a firm decide what business to enter?</p>
<p>It is driven by knowledge, interests and profit.</p>
<p>What does quantity and price depend on?</p>
<p>the market structure under which the firm operates.</p>
<p>What is a firm's objective?</p>
<p>Maximising profit</p>
<p>How do you measure productivity?</p>
<p>The ration of input to output or the production per person</p>
What is short run?
A timeframe in which the quantity of at least one input is fixed. And the Q of the other inputs can be varied.
What does the cost of production depend on?
1. Price of resources and relationship
2. Productivity
3. Time of production (short run or long run)
In short run what is easy to change?
Labour
In short run what is fixed?
Landsize, technology and capital
Why would you be an MNC?
Cheaper labour, less regulations in certain countries
What do you need to start a business?
1. Interest
2. Knowledge
3. Profit
What does the production function do?
Expresses output as a function of inputs required to make it
What is TP?
Total product produced
In short run how do you increase TP?
And decrease?
Increase labour
Decrease labour
What is MP?
Change in TP per each additional unit of labour
What is AP?
Average product. TP/Q of labourers
Why is the TP curve sloped in SR?
Law of diminishing return because you increase one input while other inputs remain the same. Also exhaustion of specialisation.
How does MP change as you increase labour?
MP initially goes up because you can do more with more labourers. Then it reaches a max because of exhaustion of specialisation, then it goes down again
So what does the MP graph look like?
A parabola
how do you calculate AP on a graph?
Slope of the line from origin to a point on TP
What happens when the marginal is bigger than the average?
Lets say the average number of apples per person was four apples, then someone brings ten apples, how does the average change? It goes up
Therefore when marginal is bigger than average, average increases
What happens when marginal is equal to average?
When the average nymver if apples per person is 4 and someone else brings in 4 apples, how does the average change? It stays the same
Therefore when marginal is equal to average, average stays the same
What happens when marginal is less than average?
When the average number of apples per person is four apples, and someone brings three apples, what will happen to the average? It will go down.
Therefore when marginal is less than average, average decreases.
What is short run total cost?
Fixed cost + variable cost
What is fixed cost?
Cost that is not related to the output
What is an example of a fixed cost
A minimum cost
What is fixed cost also known as?
Sunk cost because it is not looked at when deciding whether or not to stay in business.
What do you look at instead when determining whether to stay in business or not?
Instead you look at variable cost.
What do you do if total revenue is greater than or equal to variable cost?
Stay in business
What do you do if total revenue is less than or equal to variable cost?
You either shut down or you leave
Can you leave the market in short run?
No
What does it mean to shut down?
You temporariliy stop producing
If you cannot maximise profit in the short run, what is your aim?
To minimise loss
What is the maximum amount you are allowed to lose in short run?
FC
in LR what is the max you are allowed to lose?
0
So what is the goal of LR?
Only to maximise profit§
What is the difference between the total cost curve and the variable cost curve?
They are parallel but total cost is exactly FC higher
How do you calculate marginal cost?
Change in total cost / change in quantity
∆FC / ∆Q + ∆VC / ∆Q
∆FC is 0 as it is a fixed cost so there is no change
Therefore MC = ∆VC/∆Q
Why cant you lose more than fixed cost?
If you lose more than fixed cost you should shut down, because then you will lose just fixed cost.
What happens to AFC as quantity increases?
It decreases because the FC always stays the same but as Q increases you divide it by more and more.
Imagine you have 100 apples and more people come and want some apples. It reaches an asymptote
Why do ATC and AVC come closer together?
The difference between them is AFC which is decreasing as Q increases
Why is AVC U shaped?
The Law of diminishing return
Explain the law of diminishing return
1. Specialisation means productivity increases so marginal productivity increases which leads to marginal cost decreasing.
2. Exhaustion of specialisation leads to productivity going down. MP goes down and marginal cost goes up.
When marginal goes up, average goes up. So this leads to ATC going up.
Is there a fixed cost in the long run?
No
What does it mean if at 0 output there is a number for total cost?
You are in the short run and this is fixed cost.
How do you calculate average cost?
TC/Q
So FC/Q + VC/Q
What happens at the minimum AVC?
AVC = MC
So ATC = AFC + MC (Because AVC and MC are equal)
ATC > MC because ATC is AFC bigger than MC
Since the average is highger than the marginal, the average is decreasing.
If you can decide what is the most efficient way of production, are you in short run or long run?
Long run because you can choose
When you hire machines and labour are you in short run or long run?
A short run within a long run, because the machines and labourers are now your fixed variables
What are long runs made up of?
Many short runs
Which short run do you choose in the long run?
The one that minimises my cost in order to maximise my profit
What is the long run average cost curve made up of?
The minimum point of many short run average cost curves.
Why the minimum point? Because you are trying to decrease the costs so you will compare the cheapest of each one
So you could say LRAC is an....
envelope that contains many SRAC curves and touches them all once at the minimum point
Why is the short run average cost curve u shaped?
Specialisation and exhaustion of specialisation
why is the LRAC curve u shaped?
Return to scale
What is return to scale?
What happens to output when you increase all of the inputs by the same percentage
When you increase all inputs by 100 percent and output increases by more than 100 percent, what happens to average cost?
Average cost decreases
When you increase all inputs by 100 percent and output increases by 100 percent, what happens to average cost?
Average cost remains constant
When you increase all inputs by 100 percent and output increases by less than 100 percent, what happens to average cost?
Average cost increases
If output increases faster than input what is this called?
Economies of scale or increasing return to scale
If output increases as fast as input what is this called?
Constant return to scale
If output increases slower than input what is this called?
Diseconomies of scale or decreasing return to scale
Where do you want to be on the LRAC curve?
At the end of IRS and beginning of CRS. This is Minimum efficient scale
What is minimum efficient scale?
Normal profit
Why do we have increasing return to scale?
1. Technical economies
2. Managerial economies
3. Purchasing economies
4. Marketing economies
5. Financial economies
What are technical economies?
some factors of production are indivisible, so that to make full use of them a large scale output or a large firm is required. E.g. it is difficult for a worker in a small firm to be part mechanic, part supervisor, part electrician and still be as efficient as an employee who specialize in one task in a big firm. In a large firm workers increase their productivity through experience, learning by doing and save time from moving from one task to another. Economies of scale can occur b/c specialization allows for greater productivity.
What is managerial economies?
Same as technical economies but with managers. Bigger firms can employ more specialist higher up staff.
What is purchasing economies?
Bigger firms can buy in bulk which makes things a lot cheaper
What is marketing economies?
Advertisement becomes cheaper the more sold. It is a fixed cost so it doesnt matter how much is sold but if you sell more its less expensive.
What are financial economies?
Larger firms with larger resources usually find it easier to borrow money from banks as they present a lower risk
What is Q*?
Profit maximising output
How do you calculate Q*?
1. Find the biggest possible gap between TR and TC
2. Marginal analysis where MR = MC
