ECON 201 Final Exam Barnes Loyola Chicago

Monopoly

a firm that is the sole seller of a product without close substitutes. has market power, price maker

main sources of barrier to entry

monopoly resources, government regulation, the production process

monopoly resources

a single firm owns a key resource required for production

Government created monopolies

the government gives a single firm the exclusive right to produce some good or service

natural monopolies

a single firm can produce output at a lower cost than a large number of producers

monopoly

faces the entire market demand, downward sloping demand

competitive firm

small, one of many, price taker, face individual demand at P: perfectly elastic demand

What happens to a monopoly's revenue when it increases quantity?

Increasing quantity has two effects on revenue, output effect and price effect

What is the output effect on a monopoly's revenue?

Higher output increases revenue.

What is the price effect on a monopoly's revenue?

Lower price decreases revenue.

marginal revenue < price

To sell larger Q, the monopolist must reduce the price on all units it sells

What happens if a monopoly's revenue is negative?

price effect > output effect

In competitive markets, price ______ marginal cost

equals

In monopolize markets, price ______ marginal cost

exceeds

monopoly firm charges the monopoly price which is _____ the marginal cost

well above

Deadweight loss

Socially efficient quantity is found where the demand curve and the marginal cost curve intersect

Triangle between the demand curve and the MC curve

Deadweight loss

Price discrimination

the business practice of selling the same good at different prices to different customers

Examples of price discrimination

movie tickets, airline prices, discount coupons, financial aid, quantity discounts

How can government policy makers deal with the problem of monopoly?

Trying to make monopolized industries more competitive, regulating the behavior of the monopolies, turning some private monopolies into public enterprises, nothing at all

Increasing competition with anti-trust laws, such as:

Sherman Antitrust Act of 1890, Clayton Antitrust Act of 1914

What do antitrust laws do?

Prevent mergers, break up companies, and prevent companies from colluding to reduce competition

Regulation

Regulate the behavior of monopolists and regulate price.

Public ownership

Government unit can run the monopoly

Oligopoly

a market structure in which only a few sellers offer similar or identical products

Concentration ratio

Percentage of total output in the market supplied by the four largest firms

industries with four firm concentration ratios of 90 percent or more

aircraft manufacturing, tobacco, passenger car rentals, express delivery services

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Monopolistic Competition Characteristics

many sellers, product differentiation, free entry and exit

Factors of production

inputs used to produce goods and services - labor, and capital

Production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

Marginal product of labor

increase in the amount of output from an additional unit of labor

Diminishing marginal product

the marginal product of an input declines as the quantity of the input increases

Labor Supply Decision

the income effect reflects the response of hours worked due to a change in a persons level of economic well-being

Equilibrium wage

Any event that changes the supply or demand for labor, must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal

Capital

equipment and structures used to produce goods and services

Purchase price

the price paid to gain permanent ownership of a factor of production

Rental price

the price a person pays to use that factor for a limited period of time

compensating differentials

difference in wages that arises to offset the nonmonetary characteristics of different jobs

Human capital

the accumulation of investments in people, such as education and on-the-job training

natural ability

Workers with greater natural ability earn more

effort

people who work hard are more productive and earn more

chance

can influence wage

superstar phenomenon

great public appeal and astronomical incomes

Superstars arise in markets where

- Every customer in the market wants the good supplied by the best producer

- services are produced with a technology that makes it possible for the best producer to supply every customer at low cost

monopsony

Market with only one buyer

reasons for above equilibrium wages

1. minimum wage laws

2. unions

3. efficiency wages

effects of above-equilibrium wages

1. surplus of labor

2. unemployment

union

A worker association that bargains with employers over wages, benefits, and working conditions

strike

a collective refusal to work organized as a form of protest

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

discrimination

the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics

statistical discrimination

Arises because an irrelevant but observable personal characteristic is correlated with a relevant but unobservable attribute

market economies

usually achieve greater prosperity, but prosperity is not shared equally

labor

the most important factor for determining households' standard of living

Quintile Ratio

the income of the richest quintile divided by the income of the poorest quintile

poverty rate

the percentage of people who live in households with income below the official poverty line

poverty line

absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty

in-kind transfers

transfers to the poor given in the form of goods and services rather than cash

life cycle

the regular pattern of income variation over a person's life

permanent income

a person's normal (average) income over several years

Utilitarianism

the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society

utility

Measure of satisfaction

liberal contractarianism

the political philosophy according to which the government should choose policies deemed just, as evaluated by impartial observers behind a "veil of ignorance"

maximin criterion

the claim that the government should aim to maximize the well-being of the worst-off person in society

social insurance

government policy aimed at protecting people against the risk of adverse events

libertarianism

the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income

safety net

government programsadd policies to reduce the number of people living in poverty

Welfare

government programs that supplement the income of the needy

examples of welfare

TANF, SSI

negative income tax

a tax system that collects revenue from high-income households and gives subsidies to low-income households

in kind transfers

homeless shelters, soup kitchens, SNAP, Medicaid