Economics of Market Entry, Competition, and GDP Measurement

What happens to a firm's demand curve when a new competitor enters the market?

The demand curve shifts left, leading to a smaller quantity sold and a loss of market power.

How does the exit of existing competitors affect a firm's demand curve?

The demand curve shifts right, allowing the firm to sell a larger quantity and gain market power.

What is the effect of increased competition on ticket prices, as illustrated by Southwest Airlines?

Increased competition can lower ticket prices, as seen when a $500 ticket drops to $300.

What is the relationship between economic profits and market entry?

Positive economic profits attract new rivals, leading to a decrease in market share and price.

What occurs when economic profits are negative?

Some rivals exit the market, increasing market share and price for remaining suppliers.

What is the long-run tendency of economic profits in a competitive market?

Economic profits tend toward zero in the long run due to free entry and exit of firms.

What are barriers to entry in a market?

Barriers to entry are obstacles that prevent new suppliers from entering a market and competing.

Name one demand-side strategy for creating barriers to entry.

Creating customer lock-in to prevent new entrants from winning over existing customers.

What is a supply-side strategy for creating barriers to entry?

Developing unique cost advantages that larger firms have over smaller competitors.

How can regulatory strategies create barriers to entry?

By enlisting government policy to prevent entry, such as requiring licenses or patents.

What is the role of switching costs in market competition?

Switching costs prevent new entrants from attracting existing customers by making it costly to change providers.

How does a firm's size affect its cost advantages?

Larger firms can often buy raw materials in bulk, reducing costs compared to smaller rivals.

What is the virtuous cycle in market leadership?

As a market leader produces more, they learn to lower costs, reinforcing their position as a leader.

How does research and development contribute to a firm's competitive advantage?

It leads to new products and lower costs for existing products, enhancing profitability.

What is the significance of patents in market competition?

Patents provide a temporary monopoly that incentivizes innovation by protecting profit margins.

What is the regulatory burden associated with starting certain businesses?

Opening businesses like childcare centers or hospitals often involves complex regulatory procedures.

What is the impact of compulsory government licenses on market competition?

They limit competition by regulating who can enter specific markets.

What happens to a firm's demand curve when it faces increased competition?

The demand curve flattens, leading to lower prices and reduced quantity sold.

What is the effect of incumbent firms exiting the market?

The demand curve steepens, allowing remaining firms to sell at higher prices.

What is the main goal of entry deterrence strategies?

To convince potential rivals that entering the market would lead to severe consequences.

How can a business signal readiness for competition?

By building excess capacity to indicate preparedness for a fight.

What does flooding the market entail?

Releasing a large quantity of products if new rivals enter the market.

What is the significance of irreversible sunk costs in market competition?

They signal a company's commitment to staying in the market.

How do financial resources contribute to a company's competitive strategy?

They indicate the ability to survive long and costly fights against competitors.

What is brand proliferation and how does it affect market competition?

The creation of many brands by a few companies, eliminating profitable niches for rivals.

What was Amazon's strategy to deter competition from Diapers.com?

Amazon engaged in a price war, incurring significant losses to eliminate the rival.

What is a supply-side strategy to generate additional profits?

Identifying and addressing inefficiencies to lower production costs.

What does the average revenue curve represent when charging the same price to all customers?

It is the same as the demand curve.

What are the three perspectives on measuring GDP?

Total spending, total output, and total income.

What does the equation Y = C + I + G + NX represent?

It represents GDP, where Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports.

What does consumption (C) include in GDP calculations?

Household spending on final goods and services.

What are net exports (NX) in the context of GDP?

The difference between spending on exports and spending on imports.

What is the limitation of GDP regarding non-market activities?

GDP does not include activities outside of markets, such as household production.

What is the definition of final goods in GDP?

Goods that incorporate all contributions of all prices and are ready for consumption.

What does the term 'value added' refer to in production?

The amount by which the value of an item increases at each stage of production.

What are some limitations of GDP as a measure of economic health?

It excludes non-market activities, environmental degradation, and does not account for income distribution.

How does GDP ignore the distribution of income?

It does not reflect how income is distributed among individuals, focusing instead on total income.

inflation leads a rise in BLank GDP

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