International Econ Chapter 7: Industrial Organization and Trade

What is a Monopoly?

A single price searching firm; one firm is the only seller of a product and no close substitutes.

What is Monopoly Power?

Power in international markets are scare minerals and natural resoucres.

What are two general types of Monopolies

Natural and Legal Monopolies

What is a Natural Monoploy?

The more the firm produces the cheaper each unit becomes; due to average cost declining as output increases.

The effect of Natural Monopolies?

Pushing out smaller firms who cant produce as much. Cant compete bc of higher cost per unit and lose customers.

What is Legal Monopolies?

Are property rights that keep potential competitors from entering. AKA linceses, patents and copywritten.

If MR(Marginal Revenue) is > MC( Maringal Cost)?

Profit will rise IF the monopolist prodcues an ADDITOINAL unit.

If MC( Maringal Cost) is < MR(Marginal Revenue)?

Profit will rise IF the monopolist REDUCES output.

Why would Monopoly firms want to lessen quanity instead of more?

As firms produce more, it becomes expensive to make extra units.

What is a Price-taking Firm?

A firm where they can’t control the prices.

Why do Monopolies produce less and charge more?

MC(Marginal Cost) is below price. NO competetion.

Explain Competitive Industry Profit.

When firms start making profit.Other firms will jump in and increases supply and prices go down.

The effect of Competitve Profit Industry?

Supply increase. Prices decrease. Profit disappears. ZERO economic profit in the long run.

What is Monopoly profit?

Charge more, produce less. Natural and Legal Monopolies block competition. No pressure to lower prices. No entry.

What happens when a monopoly has bad behavior?

Monopolies may engage in practices that harm competition, such as price-fixing, leading to higher prices and sell capital.

What happens within a International Monopoly Trade(Tariff)?

Tax foreign monopolies and convert it to tax revenue and transfer it to domestic customers.

In a monopoly, what is dumping?

selling goods below average cost to eliminate domestic competition (predatory pricing)

What condition is necessary for international price discrimination to work?

Resale between countries must be impossible (no arbitrage).

What are Dominant Firm Imports?

Set a high price that controls significant market share; impacting price and competition.

What are Fringe Firms ?

Firms that follow the price that dominant firms SET.

How do Tariffs affect dominant foreign firms imports?

Cost to produce goes up; profits go down. Sell less output; hurts them.

How does tariffs affect Domestic dominat firms?

Tax revenue from domestic firms. Gaining market power (produce more) but overall hurting consumers.

Define Product Differentiation?

Economists distinguish between differnt profucts and product differnces with catergories.

What is Intra-Industry Trade (Speicilaization) ?

imported and exported are tradeded similar products within the same industry.

Intra- Industry: If a high quality shirt is capital intensive?

A capital abundant country would specialize in producing shirt.

Intra- Industry: If a low quality shirt is labor intensive?

A labor INTENSIVE COUNTRY would specilaize in producing low quality shirt.

IWhy does increasing Intra-Industry lower domestic profits?

Increasing competition due to foreign firms; forcing domestic firms to lower prices and lose market share.

What is Oligopoly Trade?

A market structure dominated by small number of large firms.; high barriers prevent competitors to enter.

What is Oligopoly Collusion?

Firms in oligopoly sercretly cooperate to work together —act like a monopoly—to make more profit.

Effect on oligopoly collusion?

Prices go up—output goes down.; just like a monopoly. Must keep agreee for prices to below to make profit. !

What is oligopoly demand?

Firms in oligopoly stucIk becasue they depend on competitors.

If FIRM increase prices—> Dont FOLLOW (Lose Revenue)

If a FIRM lower prices—→ DO FOLLOW> (Revenue still drops)

Define International Duopoly

Two firms depend on its choice and the other choice of the firm to function and restrict output.

International cartel?

Payoffs for collusion can be large but typically fall apart when demand and price fall. FROM stratgey.

Ex. OPEC has enjoyed more scuess and lasted longer than predicted when it formed during 1970s.

Other types of Trade?

Technology