MICRO FINAL

Two Distinguishing characteristics of Oligopolistic Market

1. small number of firms
2. firms engage in strategic decision making

contestable market theory of oligopoly

judges an industry's competiveness more by performance and barriers to entry than by structure

cartel models of oligopoly

concentrate on market structure

oligopolist's price will be somewhere

between the competitive price and the monopolistic price

North American Industry classification system (NAICS)

classifies industries by economic activity

industry structures are measured by

concentration ratios and herfindahl indexes

concentration ratio

sum of the market shares of individual firms w/ the largest shares in an
industry (higher ratio, closer industry is to oligopolistic or monopolistic structure)

Herfindahl index

sum of the squares of the individual market shares of all firms in an industry (gives more weight to firms with large market shares)

Antitrust Policy

government's policy toward the competitive process

market judgment by performance

judging competitiveness of markets by behavior of firms in market

market judgment by structure

judging competitiveness of markets by now many firms operate in the industry and their market shares

strategic decision making

taking explicit account of a rival's expected response to a decision
you've making

implicit collusion

multiple firms make the same pricing decisions who having explicitly consulted (ex: social pressures for small town businesses)

kinked demand curve

firms believe that if they increase price but other firms don't go along, perceived demand will be very elastic (lose $) but if they decrease price other firms would match so they'd gain very few sales

when demand curve has a kink,

MR must have a gap

two extremes of oligopoly model

cartel/monopoly price - contestable market/competitive price

antitrust enforcement has declined because of

changes in ideology, the advent of
globalization, and advances in technology

"competition is for losers"

refers to the belief that the goal of all businesses is to become monopolists

monitoring problem

incentives faced by managers are not always to maximize profit of the firm

incentive-compatible contracts

help to alleviate the monitoring problem

x-inefficiency

firms operating less efficiently than they could technically

how to limit x-efficiency

threat of competition or takeovers

competitive process involves a continual fight between

monopolization and competition

suppliers are willing to pay an amount equal to the

additional profit gained from the restriction

consumers are willing to pay an amount equal to the

cost of products to avoid a restriction (but face
a higher cost for organizing their efforts)

how do firms compete against patents

by making slight modifications to existing patents
and engaging in reverse engineering to copy other firms' products within the limits of the law

how is us government deregulating natural monopolies

by dividing the firms into various subindustries, carving out those parts that exhibit the characteristics of a natural monopoly, and opening the remaining parts to competition

when will firms stop spending money on monopolization

when the marginal cost equals the marginal benefit

how do firms protect their monopolies

by advertising, lobbying, and producing products that are difficult for others firms to copy

Implications of network externalities for the economic process

1. Increase likelihood of a winner-take-all industry
2. Might lead to less than efficient technological standards

lazy monopolists

firms that do not push for efficiency, but merely enjoy the position they're in

what can create natural monopolies

economies of scale

why are stock prices of start up tech companies so high

first mover advantage

technological lockin

when prior use of a technology makes adoption of subsequent technologies difficult

externality

the effect of a decision on a third party that is not taken into account by the decision maker

marginal social cost

marginal private costs of production + the cost of negative externalities

marginal social benefit

marginal private benefit of consuming a good plus the benefits of the
positive externalities

market for goods w/ negative externalities produce

too much of the good for too low a price

market for goods w/ positive externalities produce

too little of the good for too great a price

marginal private benefit is below the marginal social benefit

positive externality

marginal private cost is below the marginal social cost

negative externality

Externalities can be dealt w/ through

1. Direct regulation (gov)
2. Incentive policies
3. Voluntary solutions

which programs are most efficient for externalities

incentive-based

tax incentive program

using a tax (in amount of externality) to incentivize

effluent fees

charges imposed by the gov on the level of pollution created

market incentive plan

requiring market participants to certify that they have reduced total consumption by a specified amount (buy certificates)

why are voluntary solutions difficult to maintain

the incentive of free riders

optimal policy

marginal cost of a policy equals its marginal benefit (ex: optimal level of pollution)

public goods

nonexclusive and nonrival (difficult to measure benefits bc consumer preferences aren't revealed through the market)

theoretical way to calculate market value of a public good

vertically sum individual demand curve

adverse selection problem

market for some goods disappear be of witheld information

moral hazard problem

when people don't have to bear the negative consequences of their actions

what problems does the health insurance market suffer from

adverse selection problem and moral hazard problem

solutions to the informational problem

1. Licensure
2. Full disclosure

Government failure occurs because

1. Governments don't have an incentive to fix the problem
2. Governments don't have enough information to deal w/ the problem
3. Intervention is more complicated than it initially seems
4. The bureaucratic nature of government precludes fine-tuning
5. Government intervention often leads to more government intervention

Arthur Cecil Pigor

wrote the Economics of Welfare, developed Marshall's concept of externalities

incentive effect

how much a person will change their hours worked in response to a change in the wage rate (higher wage = higher quantity supplied)

Elasticity of market supply depends on

1. Individuals' opportunity cost of working
2. The type of market being discussed
3. The elasticity of individuals' supply curves
4. Individuals entering and leaving the labor market

demand for labor

derived from the demand by consumers for goods and services (higher wage = lower quantity of labor demanded)

Factors influencing the elasticity of demand for labor

1. Elasticity of demand for firm's good
2. Relative importance of labor in production process
3. Possibility, and cost, of substitution in production
4. Degree to which marginal productivity falls w/ an increase in labor

reasons for a shift in the demand of labor in recent years

technological advances and changes in international competitiveness (net effect = increase in demand for labor)

monopsony

market in which a single firm is the only buyer (hires fewer workers at a lower wage compared to competitive firm)

where does monopsony hire

where MFC = demand

marginal fixed cost (MFC)

cost of hiring one additional worker (wage of additional worker + raise to other workers)

bilateral monopsony

market in which there is a single seller and a single buyer (wage and # of workers hired depend on relative strength of the union and monopsonist)

efficiency wages

wages paid above the going market rate to keep workers happy and productive

comparable worth laws

views of fairness in the labor market have led to flaws that mandate comparable pay for comparable work

union monopoly

incentive to restrict labor supply to increase members' wages

Discrimination may be based on:

1. relevant individual characteristics 2. relevant group characteristics3. 3. irrelevant individual characteristics

Noneconomic forces influencing labor laws:

1. Legal restrictions
1. Unionizing

Tournament Market

top reward is very lucrative to induce people to work harder to "win it all"

labor unions are more powerful in labor market w/

inelastic demand

how do labor unions deal with surplus

feather bedding (requiring more workers than needed)

income

wages + interests and dividends + profit + "in kind" income (job perks)

wealth

assets - liabilities (debt)

substitution effect for labor supply

as wage rates rise, workers are willing to work more and substitute away from their leisure time be the opportunity cost of leisure time rises w/ wages

income effect for labor supply

as the wage rate rises, workers can afford to work for fewer hours whilst maintaining their level of income

What affects labor supply:

1. The population
2. Cultural attitudes toward work
3. Health
4. Marginal tax rates
5. Wage rate

What affects labor demand:

1. Demand for goods/services produced by labor (derived demand)
2. Price of other inputs (esp. capital)
3. Labor's productivity
4. Wage rate

the lorenz curve

measure of distribution of income among families in a country (farther from 45 diagonal, the more unequal)

official poverty measure

absolute measure bc it's based on minimum food budget for a family,
relative measure bc it's adjusted for average inflation

more income inequality among _______ than income inequality _______

countries, within a country

which is distributed less equally, wealth or income

wealth

Side effects of redistribution of income:

1. Labor/leisure incentive effect (tax results in people working less)
2. Avoidance/evasion incentive effect (decreased measured incomes
3. Incentive effect to look more needy than you are

which is more effective in reducing income inequality in the US, tax policy or gov spending programs

government spending programs

progressive tax

average tax rate increases w/ income

proportional tax

average tax rate is constant regardless of income

regressive tax rate

average tax rate decreases as income increases

economic rent

the amount of income paid that's above the minimum amount needed to induce supply

rent-seeking

trying to extract revenue w/o providing any goods or services

index fund

spreads risk by diversification, increases wealth by the efficiencies of passive investments (service fees

mutual fund

diversified portfolio that is actively managed (service fees >1%)

Forms of Wealth:

1. Human Capital (limited liquidity)
2. Financial instruments (high liquidity)
3. Housing (limited liquidity)
4. Consumer durables (limited liquidity)
5. Other assets like gold, land, art, etc (mixed liquidity)

stocks

shares of ownership in a company, issuer = private sector

bonds

a promise to pay a certain amount of money at specified times in the future to bond holder, issuer = private or public sector

Investor owns bonds in hopes of generating income by:

1. The stream of interest payments 2. The price of bonds increasing

bond funds

lots of bonds

hedge funds

high risk, not regulated

interest rates go UP bond prices go

DOWN (people can buy better-returning bond for same amount)

interest rates go DOWN bond prices go

UP (your bond is more valuable so people will pay more to get your return rates)