Term
| What is market structure? |
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Definition
| the genetic features of a market that affect firm behaviour (ie market power) |
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Term
| What are some examples of features that will affect market structure? |
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Definition
1. Number and size of firms
2. Type of good - degree of product differentiation
2. Entry and exit freedom |
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Term
| What is an example of an effect of market structure? |
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Definition
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Term
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Definition
| The ability of a single firm to affect price; the ability to increase price and get away with it |
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Term
| What is inversely related to market power? |
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Definition
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Term
| Perfectly competitive structure |
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Definition
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Term
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Definition
| Some market power and rivalry |
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Term
| What are the four market structures that we will be exploring? |
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Definition
1. perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly |
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Term
| What is the possible market power in a monopolistic competition market? |
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Definition
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Term
| What is the possible market power in a Oligopoly market? |
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Definition
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Term
| What is the possible market power in a monopoly market? |
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Definition
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Term
| What is the possible market power in a perfect competition market? |
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Definition
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Term
| For each market structures, what is difference in cost and revenue curves? |
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Definition
| The cost side looked identical, only the revenue side changes. |
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Term
| What are some assumptions about markets in perfect competition? |
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Definition
1. There are many many sellers so the firm's MES and size is relatively small to the industry output. Each firm doesn't affect the industry
2. Identical goods are very rare
3. Free entry and exit (no barriers to entry (BTE)). Relatively cheap to enter and exit. |
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Term
| What are some results of Assumptions 1 and 2 to perfect competition? (amount of sellers and identical goods) |
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Definition
A lot of sellers means that sellers selling the same good means seller will have no control over price.
ie no market power |
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Term
| Which perfect competition assumptions are long run vs. short run? |
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Definition
1 and 2 (amount of sellers and identical goods) are short run
3 (entry and exit) is long run |
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Term
| What is the result of Assumption 3 of perfect competition? (Exit and entry) |
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Definition
| Firms produce at LRAC - min |
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Term
| What is D curve for a firm in perfect competition and how to arrive at that conclusion? |
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Definition
Because the market sets the price, the firm's demand will be horizontal on the equilibrium price at the intersection between demand and supply curves of the industry.
Firm is a price taker and can't affect equilibrium price: it can sell at it wants to at the going price. If it raises price, will lose buyers. If it lowers P, it will lose profits. |
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Term
Total Revenue
(Equation, definition, graph shape) |
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Definition
TR=P*Q
Total Income
Straight line from origin |
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Term
Average Revenue
(Equation, definition, graph shape) |
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Definition
AR=TR/Q
Per unit income
Slope of ray from origin to TR |
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Term
Marginal Revenue
(Equation, definition, graph shape) |
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Definition
MR=Change in TR/Change in Q
Additional income from last output
Slop of tangent to TR |
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Term
| What are the revenue curves for perfect competition? |
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Definition
Total income increases
Demand for Firm and P (price?) and Average Revenue and Marginal Revenue All straight lines |
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Term
| How can a firm maximize profit in general? |
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Definition
1. Coverage of Day to day costs: If firm can cover TVC, and maybe some TFC, then it will produce SR. (TR greater than or equal to TVC or P greater than or equal to AVC).
2 Marginal Profits: If the extra revenue is greater than the extra cost of producing a unit, the firm can add the extra profit to its total profit
MR=MC |
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Term
| Short run production in a perfectly competitive structure (example graph) |
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Definition
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Term
| When are total profits maximized in short run production? |
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Definition
Total profits are maximized when additional revenue just covers additional costs
Profit maximization when: slope of TR (ir MR) = slope of TC (ie MC)
MR=MC
Two conditions of profit maximization:
1. Cover daily costs P greater than or equal to AVC
2. MR=MC (marginal profits) |
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Term
| How to find Economic profit |
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Definition
1. MR=MC (use this to find Q1 - straight line down to a point on the x axis)
2. TR=Pi*Q1
3. TC=AC1*Q1
4. Economic profit=TR-TC=(P1-AC1)*Q1
[image] |
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Term
| Normal Profit Example in Short Run production in a Perfect competition market |
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Definition
Economic profit is zero
[image] |
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Term
| Economic Loss Example in Short Run production in a Perfect competition market |
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Definition
Economic profit is less than zero
[image] |
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Term
| Shut down point Example in Short Run production in a Perfect competition market |
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Definition
Economic profit is less than zero but also TR=TVC; P just covers AVC (day to day expenses)
[image] |
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Term
| How does the supply curve come about? |
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Definition
| At a given price P1, a firm is willing to sell Q1, and at a Price P2, a firm is willing to sell Q2. This is because the quantity maximizes firm's profits |
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Term
| What is the Short Run Supply Curve? |
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Definition
MC above AVC (at any point under AVC, the firm will shut down)
PC Firm in SR uses Marginal Cost Pricing, where P=MC?? |
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Term
| What is the equilibrium for the industry? |
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Definition
Equilibrium set at industry D= industry S (Pe and QE)
This sets the Price for the individual firm
Note: Economic profits could be a loss
[image] |
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Term
| What could happen in the long run and not taken into consideration in the short run? |
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Definition
| Free entry and Exit into the industry |
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Term
| New capital only enters when? |
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Definition
| The firms in the industry are making an economic profit |
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Term
| What happens when there is continuous technological change? |
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Definition
Have been treating firms will same cost curves, but what if new firms enter with lower costs from tech?
When new firms enter, make economic profits, S increases, P falls until equal to the SRAC of new firms. OLD firms will continue to produce is P greater than AVC
- Old firms still exist at a loss if they have higher costs (as long as P greater than AVC)
- Price eventually determined by ACmin or New plants
- Once P less than AVC, old plants are economically obsolete |
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Term
| What is a declining industry? |
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Definition
industry in LR equilibrium that suffers decreasing demand
Ex. red mea, CDs, plastic water bottles |
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Term
| How do firms respond to a declining industry? |
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Definition
| 'vicious cycle': Attempts to cut costs -> failure to upgrade equipment -> LR losses |
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Term
| What is government response to a declining industry? |
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Definition
| Subsidize to save jobs -> delaying the inevitable -> 'solution' is that government should facilitate change with retraining and temporary income support |
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Term
| What happens when a firm enters an industry? |
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Definition
1. Firm originally at P1 and q1, making economic profit
2. Firms enter increase the Industry Supply from S1 to S2
3. Price falls to P2 due to change in S and firms all now making normal profit
4. conclusion: industry output rises and firm output falls |
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Term
| What is long run EQ for a perfectly competitive industry once new firms have entered? |
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Definition
After the S of the industry increases and the P for each individual firm is pushed down to SRAC minimum
2. LRAC lies below SRAC (firm lowers costs by increasing the size of the plant and profits rise
3. Firms continue to increase output until reach MES (minimum efficient scale - min Q where LRAC is minimized). |
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Term
| How can you get equilibrium in the long run for profit maximization? |
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Definition
1. P=MC (each firm profit maximizing)
2. P=SRAC min
Each firm making 'only normal profits'
3. P=LRAC min
Each firm at MES (each firm making the most of the least efficiency) |
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Term
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Definition
| When firms are producing loss of profits |
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