ECON 211 (ch 8, 9, 10)

By observing a few industry characteristics, we can predict ________ & _________

pricing & output behavior

Market structure depends on

-number of firms

-nature of product

-barriers to entry

-control over price

order of competition fields

perfect competition

monopolistic competition

oligarchy

duopoly

monopoly

perfect competition

many buyers & sellers

Homogeneous (standardized) products

No barriers to market entry or exit

No long run economic profit

No control over price

Each firm is a price taker

what is demand curve in perfect competition

perfectly elastic

demand = (in perfect competition)

marginal revenue (=Price)

the overall market for a product determines ________

the price of that product

an individual seller maxmizies their profit where _________

vertical distance between total revenue & total cost is largest

Max profit is where

MR=MC

How to find max profit (from table)

P= TR-TC

(TR= PxQ)

Find MR=MC

TC > TR, then what?

Max profit is negative

Profit equation for graph

Profit = (P-ATC) x Q

Steps of figuring out profit in Perfect Competition Graph

1. Find MR=MC

2. Find Optimal Q (Q @ MR=MC)

3. Final Optimal P (P @ optimal Q)

4. Find ATC (ATC @ optimal Q)

5. Find Profit (Use equation)

Normal profits are equal to

zero economic profits where P =ATC

When Demand (or MR) is below AVC, then firm should ______?

shut down

Short run

at least one FOP is fixed (capital)

Long run

All factors are variable, firms enter in response to profits & exit in response to losses

Marginal cost is

the difference between each TC

MC can't go over

MR

if ATC is higher than the price, then there is a _________

negative profit

where is the shutdown point on a perfectly competitive industry graph

the intersection of AVC & MC (where AVC is at min)

where is the point where the firm is making a loss but will continue to operate in the short run on a perfectly competitive industry graph?

between the shutdown point (the intersection of AVC & MC) & the break even point (the intersection of ATC & MC)

where is the break even point on a perfectly competitive industry graph?

the intersection of ATC & MC (where ATC is at min)

Where is the point where the firm is making an economic profit on a perfectly competitive industry graph

above the break even point (the intersection of ATC & MC) just on MC curve

Which point or points are on the firm's short-run supply curve in a perfectly competitive industry?

anything above the shutdown point (the intersection of AVC & MC )

loss minimization

when price < ATC, firms minimize losses by producing if P > AVC or shut down if P < AVC

Price below ATC, then what kind of profit?

Price above ATC, then what kind of profit?

negative profit

Positive profit

If price falls below AVC in short run, a firm will _______

& if it Long run?

decrease production to zero units

then firm will exit industry

A firm's short run supply curve is its

marginal cost curve above the minimum point on the AVC curve

If ATC is higher than price, then there is a

loss

profit maximizing quantity is where

MR=MC

When should a firm shut down?

When price is less than AVC

What is the Long run price & quantity for a firm?

where ATC crosses MC

Long run outcome in competitive markets exhibit what (&about them)

Productive efficiency: goods are supplied at the lowest possible cost (min ATC)

Allocative efficiency: mix of goods & services is just what society desires

Is short run is making profit in long run, then what happens to Supply in Long run?

Supply curve shifts right

Monopoly

market power

price maker (demand curve & costs utilmateiy determine price)

individual firm can set price

Price is above MC & price doesn't equal MR

(MR=MC to determine production, not price)

Why we have monopolies

1. control over a significant factor of production (De Beers)

2. Patents, Copyrights, government franchises

3. Economies of scale (major utilities like gas or water)

Natural monopoly

where economies of scale are so large that one firm can supply entire market at lower ATC than if there were more firms

A monopolist can sell additional output, only if it

reduces price

The MR curve lies

below the demand curve at every point, expect first

Where to produce for monopolist company on graph

where MR & MC meet

_______ tells us how much is good for monopolist company on graph

demand curve

How to find profit for monopolist company on graph

ATC at Q. (PxQ - ATCxQ*)

MR formula

change in TR/change in Q

Steps to find the Maximum Monopoly Profit

1. Find where MR = MC, find Q there

2.. Find P by going up D curve where Mr=MC

3. Find what ATC = at that Q value

4. Plug everything in formula (P-ATC)(Q)

What is the profit maximizing point?

Q= where MR=MC

P= Demand at that Q value where MR=MC

under conditions of monopoly, the price will be ______ & output will be ________ than under conditions of competition

& what does this create? ^^^

higher

lower

Inefficiency in the market (deadweight loss)

Who are losing in a monopoly?

consumers

How to tell if producers are winning or losing in a monopoly?

depends on how much they're gaining/ losing

monopolies create benefits in terms of

innovation: new products & technologies

To price discriminate, firms

1. must have some control over price

2. must be able to separate the market into groups based on elasticities of demand

3. must be able to prevent arbitrage

(^ buy something for lower price & can turn around & sell it for more)

3 types of price discrimination

1st degree

2nd degree

3rd degree

1st degree price discrimination (perfect price discrimination) & examples

able to gather all consumer surplus

Earn additional profit from charging consumers their highest willingness to pay

Ex: applying for college

2nd degree price discrimination

seller charges less to buyers who buy in bulk

Earn additional profit from charging different prices based on quantity

Ex: season passes, packs of soda

3rd degree price discrimination

segment market by different demand curve (elasticity of demand)

charging different prices to different groups of consumers with varying elasticities

Ex: coupons, movie tickets: time of day & age, Airline tickets: time of purchase, type of class

relevant market: monopoly power increases as it becomes ____________

more concentrated

CR4 =

% of shares for top 4 firms added together

how to find % shares (to find CR4)

# of sales/ total # of sales

HHI (Herfindahl-Hirschman Index)

the sum of the squares of market share held by each firm (ranges from 0 to 10,000)

HHI < 1500

unconcentrated

1500 < HHI < 2,500

moderately concentrated

HHI > 2,500

highly concentrated

bigger the HHI, the ____________ competitive

less

Monopolistic competition

many firms compete by selling similar, but not identical products (differentiated)

- many buyers & sellers

- differentiated products

- no barriers to market energy or exit

- no long run economic profit

- some control over price

how does a Monopolistic competition differentiate products

superior products

better location

superior service

clever packaging

advertising

Profit maximizing for monopolistic competition

same as monopoly

1. Find where MR = MC, find Q there

2.. Find P by going up D curve where Mr=MC

3. Find what ATC = at that Q value

4. Plug everything in formula (P-ATC)(Q)

Long run adjustments (monopolistic competition)

if firm earning _____________, new firms will enter industry

Competition ________ demand for each individual seller, shifting demand curve to ______

In long run, each seller earn normal profits, so that price equals ___________

economic profits

reduces, left

ATC (not minATC)

Oligopoly

relatively new firms

interdependent decision making

Substantial barriers to market entry (huge fixed costs create this)

Potential for long run economic profit

Shared market power & considerable control over price

Cartels

agreement between firms in industry to formally collide on price & output & then agree on distribution of production (reduce overall supply to raise profits)

In cartels, they (_______ overall supply to _______ profits)

reduce

raise

oligopolist

large relative to the market & the actions of one oligopolist make large differences in the profits of another

Two types of oligopolist & about

interdependence

choice of P or Q affects rival firm's profits & vice versa

Game theory

Study of how people make decisions when attaining their goals depends on interaction with other players

Two types of game theory & about each

sequential move games

one player at a time

Simultaneous Move game

actions occur at same time

Basic components of game theory

players (2 competitions firms)

information (no private info)

Strategies (enter/exit, price high/low, etc.)

Payoffs (usually profits)

Outcomes (Resulting outcome from playing best strategy)

in a cheating situation in a cartel, how is better off & who is worse off?

every country/ business is worse off expect for the one who cheated

how to determine how much each company loses in a cheating situation in a cartel

(P x Q) - (New Profit x Q*)

how to solve sequential Games

backwards induction

start with one company, starting at ends & look at what options give you best outcome for that company, then look at other company)

if a firm producing a quantity where MR exceeds MC, the firm should ______ existing levels of production in order to _________ profitability

expand

Increase

A Nash equilibrium occurs when

no player has an incentive to unilaterally change strategies.

In the prisoner's dilemma, firms could do better if they both did _____

exactly the opposite of what they ultimately choose to do.

USA imports _____ of oil & most of it comes from ________

40%

Canada

steps of backward induction

check for white # for company B based on the two choices that company A makes first. Then from those two choices, pick whichever has largest # for company A

Nash equilibrium

occurs when all players in a game use an optimal strategy in response to all other players' strategies

Maximizes the expected payoff given all possible scenarios

dominant strategy

Occurs when a player chooses the same strategy regardless of what his or her opponent chooses.

(a Nash equilibrium results because of this)

profit is neg in SR, then firm

However, if the price drops ^^^ in SR, then firm

What about in LR?

stays & produces

Produces zero

Exits

restrict supply/ low output =

price goes up/ profit increases

(collusion both choose low)

Prisoner's Dilemma

when dominant strategies make players worse off then if they worked together

(when the payoffs are the same)

Dominant strategies steps (how to solve)

1. Look at Company A & see what it should do when Company B produces more or less

2. Look at Company B & see what it should do when Company A produces more or less

3. Dominant strategy is the box that includes the best strategy for Company A & the best strategy for Company B

For competitive firm where is P*

where MC crossed D

How to find profit from table

Profit - (MCxP)

how to find LR price & quantity for firm

ATC crosses MC (minATC)

Price below shut down point, then what in SR?

zero

where/ what is the shut down point

MC = AVC

Cartel cheater gain formula

(Initial units + cheating units) x New Price