econ exam 3

perfect composition characteristics

1. large number of buyers and sellers

2. price takers

3. simalar ex:apples

4. no barriers to entry/exit

5. acct pi

example of perfectly competitve firms

comodities

ex→milk and blueberries

Barriers to entry and exit of perfect compensition

• control of natural resource

• technology superiority

• Gov made barriers (patents)

price takers

Firms that take or accept the market price and have no

ability to influence that price( perfect competition)

marginal revenue

The change in a firm’s total revenue that results from a

one-unit change in output produced and sold.

Optimal rule

MR=MC additional cost from selling one more

average revenue

Revenue per unit sold, equal to total revenue divided by the

quantity of output produced and sold.

steps for perfect competition

1. find mr=mc and go down to find Q* P=mr

2. find that Q* go up to ATC

3. Compare P to ATC

shut down or operate at a loss

Firms can’t choose P and in the short run they must pay fixed cost

shut down:

Q* = 0 and only pay fixed cost

Operate at a loss:

Q > 0 and use any payoff to pay part of fixed cost

Shut down point

if price < AVC shut down

shut down for short run

IF we have a loss determibe if you shut down (P below AVC) or produce at a loss (P>AVC) only in short run

Monopoly Characteristics

• 1 seller and many buyers

• price maker

• Differentiated products

• Barriers to entry/ exit

• econ price > 0

Examples of monopolies

• Diamonds

• amazon

• Google

monopoly power

The ability of a monopoly to influence prices by controlling the quantities that it produces in the market

Monopoly pricing

if a monopoly wants to increase its quantity, it must lower the

price for every unit it sells.

Quantity effect - monopoly

selling one more unit increases total revenue by the price

pricing effect

selling one more unit decreases total revenue because the price must be lowered

Optimal rule for Monoply

MR = MC

Price does not equal MR%

Steps for monoplies choice

1. Find MR = MC and go down to Q*

2. From Q* go up to demand to find P*

3. From Q* go up to ATC

4. Compare P to ATC

First degree price discrimination

The practice of charging each and every consumer the price that she is willing and able to pay for a good or service.

ex: Car salesman

Second degree price discrimation

The practice of charging different prices per unit for different quantities, or

blocks, of a good or service.

ex: Bulk(costco)

Block(airlines)

third degree price discrimination

The practice of dividing market participants into groups

based on their elasticities of demand in order to charge

each group a different price for the same good or service.

ex: student or senior discount

what price discrimation is an auction?

first

what price discrimation are gas discounts to grocery store members

third

what price discrimation is buy one get one

second

Natural monopoly

An industry in which economies of scale are so extensive that the market is better

served by a single firm.

ex: public utilites, electricity grid

Monoplostic competition

an imperfect market structure where many firms sell similar, but not identical, products

ex: restraunts, clothing brands, coffee shops, makeup brands

Oligopoly charactersitcs

1. Many buyers and few sellers

2. price makers*(mutual interdependece)

3. Homogenus and differentiated

4. some barriers to entry and exit

Examples of Oligopolies

coke and pepsi

cellphones

car manufacture

How to graph and solve oglipoly

same as monopoly

Price leadership in ogligoply

A practice used by the dominant firm in a noncollusive

oligopolistic market to signal price changes.

ex: when apple makes the phone $1200 samsung will do the same

limit pricing

The practice used by the dominant firm in a noncollusive

oligopolistic market to prevent the entry of new firms by

establishing a price lower than the short-run profit-maximizing

price

ex: when competitior comes in they will charge lower to drive competitior out

Cartel

In some cases, firms may

work together to “act” like

a monopolist

problems: Illegal, and incentive to cheat

Price leadership vs cartel

Price leadership generates independent and infrequent price

changes Vs. Collusion (Cartels) works to make markets less competitive by

unifying the price or output responses of firms.

Antitrust laws

To prevent companies from unfairly restricting competition in a market

types: Sherman, Clayton, and FTC Act

what is Game theory

The study of strategic behavior of decision makers

Payoff matrix

A table showing the potential outcomes arising from the

choices made by decision makers

nash equilibrium

An outcome in which decision makers choose their dominant strategy and each has no incentive to independently change his or her strategy

Dominant Strategy

A situation in which a particular strategy yields the highest

payoff regardless of the other decision maker’s strategy.

Collusion

A situation in which decision makers coordinate their actions

to achieve a desired outcome. Collusion is generally used to

achieve an outcome that would not be possible in the

absence of coordinated actions, and it is typically associated

with illegal or anticompetitive behaviorsFirst-Mover Advantage

First-Mover Advantage

The advantage that a player

receives by moving first in a sequential game, and thereby

influencing the set of possible outcomes.

repeated games

A situation in which a game is played a (potentially infinite)

number of times, with the players choosing a strategy each

time.

what must be true in order to have a price discrimination

they must be the exact same item

what is the purpose of ant trust laws

to protect consumers

what was the first anti trust law and why was it created

sheman antiust law and was created because of rokafeller

prisoner dillema

one nash equllibrum, good soluion but choose the worst option

Battle of the sexes

both have favorite actions but would rather be together, Two nash equillibrum

Chicken

Two nash equalibrium, one winner and one loser

When does shut down happen

shut down only happens with perfect competition and in the short run when the price is below average variable cost

what is the only effective market type with no deadweight loss?

perfect competiton