ECON2027 Final Exam

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80 Terms

1

1.) perfect competition
2.) monopolistic competition
3.) oligopoly
4.) monopoly

what are the 4 market structures?

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2

1.) monopolistic competition
2.) oligopoly
3.) monopoly

what are the 3 types of imperfect competition?

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3

many small firms

what is the size of perfect competition?

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4

someone who takes the market price

what is a price taker?

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5

price takers - market price

what are the prices set in perfect competition?

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6

homogenous (ex: oil)

what is the product type in perfect competition?

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7

none

are there barriers to entry in perfect competition?

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8

many firms

what is the market size in monopolistic competition?

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9

price seekers - maximizes profit

what are the prices set at in monopolistic competition?

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10

differentiated

what is the product type in monopolistic competition?

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11

none

are there any barriers to entry in monopolistic competition?

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12

few firms

what is the market size of an oligopoly?

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13

price seekers - maximizes profit

what is the price set at in an oligopoly?

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14

yes

are there any barriers to entry in an oligopoly?

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15

one firm

what is the market size of a monopoly?

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16

price seekers - maximizes profit

what are the prices set at in a monopoly?

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17

differentiated

what is the product type in a monopoly?

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18

yes

are there any barriers to entry in a monopoly?

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19

where individual sellers have no influence on price - why take market prices

what is perfect competition?

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20

horizontal demand curve

what does the demand curve of perfect competition look like?

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21

individual sellers do have an influence on price - seek best price to maximize profit (price seekers)

what is imperfect competition?

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22

normal demand curve

what does the demand curve of imperfect competition look like?

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23

1.) large number of small independent buyers and sellers
2.) firms sell a homogenous product
3.) no barriers to entry or exit
4.) perfect information

what are the 4 characteristics of perfect competition?

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24

all prices are known to buyers and sellers

what is perfect information?

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25

leads to an increase in competitiveness

an increase in information...

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26

the product is homogenous so they are perfect substitutes for each other

why is there no advertising in perfect competition?

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27

1.) profit
2.) breakeven
3.) shutdown
4.) produce at loss
5.) indifferent

what are the 5 options for a firm?

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28

money in excess of opportunity cost

what is profit?

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29

economic profit = 0

what is breakeven?

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30

you are still earning the opportunity cost

why is breakeven not a bad thing?

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31

by staying in production, if TR > TVC then you can take the money left over after paying L and use it to pay down fixed cost of K -> lose less

how is it possible to lose less sometimes?

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32

if cannot pay L you will lose more money by staying in production

why would a firm need to shut down?

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33

in doing this, all TVC (L) is covered and some TFC (K) is covered

why would a firm produce at loss?

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34

companies with large K costs have more flexibility (due to AFC) so have large space to maneuver

which kind of companies have more ability to produce at loss?

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35

same loss whether producing or not; TR=TVC, can pay L but cannot pay TFC (K)

what does it mean if a firm is indifferent?

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36

economic profit will breakeven (0) because there are no barriers to entry or exit

what happens to economic profit in the long run in perfect competition?

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37

will attract new entrants, increasing supply which decreases price to breakeven (0)

what occurs when economic profit > 0?

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38

firms leave the market, decreasing supply and increases price to breakeven (0)

what happens when economic profit < 0?

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39

a single firm produces a product for which there are no close substitutes and entry of new firms cannot take place

what is a monopoly?

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40

because the highest prices that the firm can charge at each quantity is determined by the demand curve - they search for the correct price to maximize profit

why is there no supply curve in a monopoly?

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41

1.) cartels
2.) no close substitutes
3.) barriers to entry

what are the 3 considerations of a monopoly?

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42

make it difficult or impossible for others to enter the market

what are barriers to entry?

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43

legal and non-legal

what are the 2 types of barriers to entry?

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44

requires the government

what are legal barriers to entry?

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45

public franchises, patents, and government licenses

what are the types of legal barriers to entry?

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46

government grants the exclusive right to produce a good

what is a public franchise?

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47

government grants exclusive right to produce over time, gives an incentive to invent

what is a patent?

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48

economies of scale and owning all of an essential resource

what are examples of non-legal barriers?

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49

phenomenon where the average costs per unit of output decrease with the increase in the scale or magnitude of the output being produced by a firm

what is an economy of scale?

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50

one company is better than many (water company)

what is a natural monopoly?

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51

at 1/2 of demand (with a downward sloping demand line)

when does marginal revenue (MR) cross the quantity (Q) line?

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52

in the LR economic profit does not = 0, max profit is still where MR = MC

what happens to economic profit in the long run of a monopoly?

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53

each company is similar to a monopoly, but other firms can enter the market with similar products

what is monopolistic competition?

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54

since it is similar to a monopoly, it will be the same graph/structure

what does the graph and profit structure of monopolistic competition?

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55

1.) large number of sellers
2.) product differentiation
3.) free entry
4.) advertising is important

what are the 4 characteristics of monopolistic competition?

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56

differences in branding, perceived difference, location etc. that differ products in ways other than prices

what is product differentiation?

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57

shifts demand out (increases), therefore shifts out marginal revenue (MR) as well

why is advertising important in monopolistic competition?

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58

a few firms produce either a differentiated or undifferentiated product

what is an oligopoly?

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59

a differentiated product

what makes an oligopoly more like a monopoly?

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60

an undifferentiated product

what makes an oligopoly more like perfect competition?

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61

leads to an increase in emphasis on price

an increase in similarity of products in an oligopoly...

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62

1.) mutual interdependence
2.) barriers to entry

what are the 2 characteristics of an oligopoly?

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63

what the firm does affects the others

what is mutual interdependence?

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64

you act based on what you think the other person/party is going to do

what is game theory?

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65

there are other factors involved like game theory/mutual interdependence

why is it difficult to use MR=MC for profit max in a oligopoly?

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66

natural barriers like economies of scale and artificial barriers

what are the causes of barriers to entry?

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67

in an oligopoly, the demand curve (thus MR curve) is affected by what other companies do

why does the demand curve shift in an oligopoly?

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68

pricing below profit max levels to deter entry

what is limit pricing?

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69

lower profit in the short run, but increase in profit in the long run

what is the idea behind limit pricing?

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70

a formal alliance of firms that decrease output and increase prices in order to increase industry profits

what is a cartel?

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71

monopoly

a cartel acts like a _________

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72

"hard" cartel and "soft" cartel

what are the two types of cartels?

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73

illegal, price fixed by agreement

what is a "hard" cartel?

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74

industry max profit is not the individual company's profit - incentives to cheat

what is the problem with "hard" cartels?

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75

legal, government involved, laws to limit entry

what is a "soft" cartel?

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76

professional world like doctors, lawyers, etc.

what is an example of a "soft" cartel?

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77

they eventually collapse due to greed

why do economists not worry about cartels?

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78

1.) fewer firms will increase success
2.) having a homogenous product will increase success (emphasizes price)
3.) growing demand and increase in tech = more success because decrease in cost
4.) more likely to succeed with low buyer turnover (stable market and divides sale area)
5.) less likely for success is large buyers present

what are the 5 factors affecting cartel success?

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79

price (capitalism) and quantity (communism) but not both

what are the 2 ways to allocate goods?

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80

who decides who gets what? incentive for favoritism

what is the problem with allocating goods by quantity?

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