Intro to Microeconomics Final

monopoly

one firm produces all the output in a market, charging a price that is subject to the demand curve with no competition, often called “price makers”

barriers to entry

legal, technical, or market obstacles that discourage or prevent potential competitors from entering a market

natural

physical

legal

intimidation

4 types of monopoly

natural monopoly

when a single company can produce a good at a lower cost than its competitors, resulting in lower competition, like airplane parts from Boeing

physical monopoly

when a single company has control over a natural resource, such as water

legal monopoly

when a single company has exclusive rights from the law from competition, such as patents, licenses, and copyrights

intimidation monopoly

when a single company creates threats or undercuts everyone else on price, like Standard Oil

allocative efficiency

when resources are used where their marginal benefit equals their marginal cost to society

monopolistic competition

a market structure in which companies compete against each other by offering differentiated products

P > MC

what price should be with respect to marginal cost in a monopoly

demand

Marginal revenue drops faster than _______ as quantity goes up because price decreases on all units in order to sell a higher quantity

Total revenue - total cost (Q*(P - AC))

Total profit equation

imperfect competition

firms that are more influential over price than perfectly competitive firms but less than monopolies

oligopoly

markets with a small number of dominating firms, like soft drinks (Pepsi and Coca Cola)

differentiated products

products that are similar but have altered aspects that makes them different on the market

physical aspects

location of the product sold

intangible aspects (promises like free delivery)

perception of products

4 ways firms differentiate products

Monopoly faces demand curve, monopolistic competition does not

How the demand curve works for monopoly vs monopolistic competition

entry and exit

In long-run, _______ induced by profit, and _______ is induced by loss

collusion

anti-competitive behavior between companies to control prices in the market, which reduces competition

cartel

formal agreement to form together and produce the monopoly output and sell at the monopoly price

game theory

a branch of mathematics that analyzes situations where players make decisions and get payoff based on decisions other players decide to make

prisoner’s dilemma

states that the gains of cooperation are greater than the rewards from pursuing self-interest

duopoly

two-firmed oligopoly where two firms dominate the market and compete with each other, often leading to strategic decision-making regarding pricing and output

kinked demand curve

competing oligopoly firms that commit to match price cuts but not price increases

what makes collusion difficult

there’s always an incentive to compete and its illegal (no contract)

perfect competition

a market structure where many firms produce an identical product with no one market having any power and having to match the market price, often called “price takers”

externality (spillover)

any voluntary exchange that affects people outside an exchange

private costs

costs that are strictly between firms and do not affect others

external costs

costs between firms that also account for the social costs that affect others

command and control

strict government regulations about the allowed quantities, like for pollution, as well as technology that may be used to combat it

marketable permit programs

a permit that allows a firm to emit a certain amount of pollution, and where firms with more permits than pollution can sell the remaining permits to other firms

market failure

when the market on its own does not allocate resources efficiently in a way that balances social costs and benefits, such as externalities

property rights (Ronald Coase)

the legal rights of ownership on which others are not allowed to infringe without paying compensation, where these being well-defined leads to better discussion

public goods

goods that are nonexcludable and nonrival, like a public park

private goods

goods that are excludable and rival, like food

common resources

goods that are nonexcludable but rival, like fish in international water

government promoting innovation

protection of intellectual property through copyrights and patents or subsidizing research vs partnership

pollution charge

tax imposed on how much pollution is produced from a firm and gives a profit-maximizing firm an incentive to reduce emissions as long as MC of reducing cost is less than the tax

asymmetric information

when one party knows more about a product than another party, or when there’s an uneven balance of information

imperfect information

when the buyer, seller, or both is not confident about the quality of a product being bought or sold

thin market

a market structure with few buyers and sellers

thick market

a market structure with many buyers and sellers

warranty

a promise to replace a ruined good for a set period of time

service contract

an extra payment to have something for a certain amount of time

occupational licenses

licenses that prove workers are qualified to work or have passed certain educational or certification requirements

cosigner

someone who signs a loan along with someone else and pledges to pay the money that is not paid off on the behalf of the original signer

collateral

property that the bank can seize and to sell to pay of unpaid loans, typically physical property

moral hazard

when people behave riskier with insurance than someone without insurance would behave

deductible

the amount needed to be paid before insurance starts to cover costs

copayment

a fixed amount of money paid for certain services, like healthcare or prescriptions, that are paid when receiving it

coinsurance

costs that are paid a percentage by the insurance and the other percentage is paid out of pocket

adverse selection

when people who are low risk opt-out of buying insurance, leaving only the high-risk people, making the charges for the insurance company more expensive

signaling

processes meant to reduce asymmetric information by demonstrating low risk behavior or qualification, such as through certifications or a resume

screening

the process of reducing adverse selection by going through potential applicants and determining their risk, often through interviews

absolute advantage

when one country has the ability to process more of one good than another country

comparative advantage

when one country has the ability to produce a good at a lower opportunity cost than another country

gain from trade

when a country can consume more than it can produce as a result of specialization and trade

infra-industry trade

the process of trading goods through the same industry from one country to another where the finished product is made in one country, such as autos

value chain

describes how a good is produced in its stages

splitting up the value chain

the stages of a good being made in different geographical locations