Econ Test 3 - perfect competition, monopoly, monopolistic competition

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externalities

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cost to people outside of transaction (eg second hand smoke)

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repugnant transactions

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people morally object even if not involved in transaction (eg human trafficking, organ sales, prostitution(

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37 Terms

1

externalities

cost to people outside of transaction (eg second hand smoke)

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2

repugnant transactions

people morally object even if not involved in transaction (eg human trafficking, organ sales, prostitution(

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3

fixed costs

initially spent, don’t increase with each unit produced

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4

variable costs

dependent on amount produced

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5

marginal product

how much more output is produced when input is increased. delta output / delta input

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6

marginal productivity decreases over time

because fixed inputs aren’t increased, and so the additional output from the variable inputs decreases. (eg if digging holes with two shovels, increasing number of people might help up until 4 or so, but after that not worth it)

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7

accounting profit

arithmetic calculation. revenue - costs

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8

economic profits

include implicit (opportunity costs). revenue - costs - opportunity cost

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9

protection from competition includes

patent, trademark, copyright, trade secrets

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10

3 aspects of perfect competition

many buyers and many sellers. goods offered are largely the same. firms can freely enter and exit the market.

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11

price taker

in perfect competition, buyers choose by price because products are the same, so all sellers have to have roughly the same price

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12

to increase revenue in perfect competition,

sellers must produce more

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13

perfect competition profit maximization point

where marginal cost intersects marginal revenue (MR=D=AR=P line)

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14

productive efficiency

firms/ producers minimizing their costs and maximizing outputs

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15

allocative efficiency

when firms produce the right quantities of consumer goods to satisfy consumer wants and needs, without waste. defined by P=MC which is true of perfect competition

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16

monopolies have market

power and share

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17

market power

ability to influence the market price of product

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18

horizontal integration

buying up all of one resource. eg owning all diamond mines

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19

vertical integration

owning every step along the way to production so not responsive to any other firm

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20

legal monopoly

allowed by government, often so can be unified and provide service to everyone across the country. (eg post office, defense)

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21

natural monopolies form

in economies of scale, because initial costs are so high and firms already in only have to deal with small marginal costs

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22

natural monopolies produce

at a lower cost than several firms in the market could

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23

monopolies have demand curve below

marginal revenue, because have to lower price when increase the quantity produced

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24

government intervention in monopolies through

price controls, public ownership of utilities, output requirements

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25

predatory pricing

a firm dramatically lowering prices to kick competitors out of market. Taking losses that others can’t because well established firms have much lower average costs. illegal but hard to determine

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26

monopoly profit maximization point

quantity is where marginal revenue intersects marginal costs, price is up vertically from that point to line of demand

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supernormal/monopoly profits

profit above the total costs. rectangle between price of charged at profit maximization point and total costs (on ATC curve)

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28

price discrimination

charging people max that think they will be willing to pay by having different prices for different demographics. (eg airline tickets at different times before flight, movies by age)

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29

price discrimination takes away

consumer surplus

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30

socially optimal point

where consumer and producer surplus are the greatest. where marginal cost intersects demand. no deadweight loss but firm might be losing money

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31

fair returns/welfare maximization point

where firm breaks even. where ATC intersects demand, so not profit, but costs covered and more consumers will buy

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32

monopolistic competition

firms try to differentiate so although they are close substitutes, they aren’t identical and people will choose their brand over others despite price. try to make each firm like its own little market through brand loyalty. eg Nike

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33

local monopolies

a monopoly based on geographic location. eg there might only be one gas station in a rural area - people who live there will probably go there even if higher price because of convenience

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34

monopolist vs monopoly

an industry with only one firm is a monopoly; a monopolist is what that one firm is called

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35

price effect

amount revenue decreases by when a monopoly increases its quantity produced because it has to lower prices to do so

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36

quantity effect

the increase in revenue when a monopolist increases its total production, because more units are sold

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37

monopolies usually under-produce because

it is more efficient for them because of the price effect, and making their product seem scarce increases people’s willingness to pay higher prices

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