MicroEconomics

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Exam #2

Market Structure

important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition

Perfect Competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run

Commodity

a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold

Price Taker

a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm. downsloping demand curves

Marginal revenue

from selling an additional unit; in perfect competition, marginal revenue is also the market price

Golden Rule of Profit Maximization

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

Average Revenue

total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price.

Short Run Firm Supply Curve

a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rise above the low point on its average variable cost curve

short run industry supply curve

a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rise above the low point on its average variable cost curve

long run industry supply curve

a curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in the market demand

constant cost industry

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal.

increasing cost industry

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward.

producer efficiency

the condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run.

allocative efficiency

the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost.

producer surplus

a bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.

barrier to entry

any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms.

patent

a legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filled. (Pharmaceuticals)

innovation

the process of turning an innovation into a marketable product

price maker

a firm that must find the profit maximizing price when the demand curve for its output slopes downward (graph: monopoly)

deadweight loss for monopoly

- net loss to society when a firm uses its market power to restrict output and increase price (graph: losses from monopoly)

monopolistic competition

a market structure with many firms selling products that are substitutes but different enough that each firm's demand curve sloped downward; firm entry is relatively easy

excess capacity

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost. [In monopolistic competition, firms fall short of producing the quantity that would achieve the lowest average cost...as opposed to perfect competition.]

oligopoly

a market structure characterized by a few firms whose behavior is interdependent

undifferentiated oligopoly

an oligopoly that sells a commodity or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil.

differentiated oligopoly

an oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal.

collusion

an agreement among firms to increase economic profit by dividing the market or fixing the prices

cartel

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist.( most famous one is oil OPAC)

price leader

a firm whose price is adopted by other firms in the industry.

market work

time sold as labor-karl marx

nonmarket work

time spent getting an education or producing goods and services for personal consumption (garden, cooking at home, knitting, etc.)

leisure

time spent on nonwork activities

Substitute Effect of a Wage Increase

a higher wage encourages more work because other activities now have a higher opportunity cost

Income Effect of a Wage Increase

a higher wage increases a worker's income, increasing the demand for all goods, including leisure, so that the quantity of labor supplied to market work decreases.

Backward-Bending Supply Curve of Labor

as the wage rises, the quantity of labor supplied may eventually decline; the income effect of a higher wage increases the demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage

Winnner-Take-All Labor Market

markets in which a few key employees critical to the overall success of an enterprise are richly rewarded.

labor union

a group of workers who organize to improve their terms of employment (government has biggest portion of union workers)

craft union

a union whose members have a particular skill or work at a particular craft, such as plumbers or carpenters (AFL-American Federation of Labor)

industrial union

a union of both skilled and unskilled workers from a particular industry such as autoworkers or steelworkers (CIO-Congress of Industrial Organizations)

collective bargaining

the process by which union and management negotiate a labor agreement.

mediator

an impartial observer who helps resolve differences between union and management

binding arbitration

negotiation in which union and management must accept an impartial observers resolution of a dispute

strike

a union's attempt to withhold labor from a firm to stop production

featherbedding

: union efforts to force employers to hire more workers than wanted or needed

right to work states

State that has prevented a union or company from negotiating a contract that requires workers to join a union as a condition of employment.

market power

: the ability of a firm to raise its prices without losing all its customers to rival firms. (Apple, Starbucks, etc.)

social regulation

government regulation aimed at improving health and safety. (Environmental Protection Agency, OSHA Occupational Safety Health Administration

anti trust policy

government regulation aimed at preventing monopoly and fostering competition in markets where competition is desirable

public utilities

government-owned or government-regulated monopolies

trust

any firm or group of firms that tries to monopolize a market

sherman antitrust act of 1890

first national legislation in the world against monopoly; prohibited trusts, restraint of trade, and monopolization, but the law was vague and ineffective.

clayton act of 1914

strengthened Sherman Act, outlawed certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor. (Teddy Roosevelt was the first trust-buster)

tying contract

a seller of one good requires a buyer to purchase other goods as part of the deal.

exclusive dealing

a supplier prohibits customers from buying from other suppliers of the product

interlocking directorate

a person serves on the boards of directors of two or more competing firms

federal trade commision (FTC) act of 1914

established by a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers.

celler-kefauver anti-merger act

passed in 1950, prevents one firm from buying the physical assets of another firm if the effect is to reduce competition. This law can block a:

horizontal merger

a merger in which one firm combines with another that produces the same product.

vertical merger

: a merger in which one firm combines with another from which it had purchased inputs or to which it had sold output. (Buy mine then steel then railroads)(Delta, the airlines industry)

consent decree

the accused party, without admitting guilt, agrees to stop the alleged activity if the government drops the charges.

per see illegal

in antitrust law, business practices that are deemed illegal, regardless of their economic rationale or their consequences.

rule of reason

before ruling on the legality of certain business practices, a court examines why they were undertaken and what effect they have on market competition

predatory pricing

pricing tactics employed by a dominant firm to drive competitors out of business, such as temporarily selling below the marginal cost or dropping the price only in certain markets.

conglomerate merger

a merger of firms in different industries

excludability

the property of a good whereby a person can be prevented from using it.

rivalry in consumption

the property of a good whereby one person's use diminishes other people's use.

private goods

goods that are both excludable and rival in consumption.

common resources

Goods that are rival in consumption but not excludable.

free rider

a person who receives the benefit of a good but avoids paying it. (Fireworks...they are not excludable)

cost-benefit analysis

the study that compares the costs and benefits to society of providing a public good.

Tragedy of the Commons

Tragedy of the Commons: a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole.

entry and exit only

The only long-run adjustment in our graphical analysis is caused by the entry or exit of firms. Moreover, we ignore all short-run adjustments in order to concentrate on the effects of the long-run adjustments.

identical costs

All firms in the industry have identical cost curves. This assumption lets us discuss an "average," or "representative," firm, knowing that all other firms in the industry are similarly affected by any long-run adjustments that occur.

constant-cost industry

the industry is a constant-cost industry. This means that the entry and exit of firms does not affect resource prices or, consequently, the locations of the average-total-cost curves of individual firms.

pure monopoly

exists when a single firm is the sole producer of a product for which there are no close substitutes. Here are the main characteristics of pure monopoly:

blocked entry

A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry. Those barriers may be economic, technological, legal, or of some other type. But entry is totally blocked in pure monopoly.

nonprice competition

The product produced by a pure monopolist may be either standardized (as with natural gas and electricity) or differentiated (as with Windows or Frisbees). Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products' attributes.

economies of scale

declining average total cost with added firm size—are extensive

cost minimization

To the firm, resource prices are costs. And to obtain the greatest profit, the firm must produce the profit-maximizing output with the most efficient (least costly) combination of resources. Resource prices play the main role in determining the quantities of land, labor, capital, and entrepreneurial ability that will be combined in producing each good or service (see Table 2.1, p. 36).

resource allocation

Just as product prices allocate finished goods and services to consumers, resource prices allocate resources among industries and firms. In a dynamic economy, where technology and product demand often change, the efficient allocation of resources over time calls for the continuing shift of resources from one use to another. Resource pricing is a major factor in producing those shifts.

policy issues

Many policy issues surround the resource market. Examples: To what extent should government redistribute income through taxes and transfers? Should government do anything to discourage "excess" pay to corporate executives? Should it increase the legal minimum wage? Is the provision of subsidies to farmers efficient? Should government encourage or restrict labor unions? The facts and debates relating to these policy questions are grounded on resource pricing.

substitution effect

The decline in the price of machinery prompts the firm to substitute machinery for labor. This allows the firm to produce its output at lower cost. So at the fixed wage rate, smaller quantities of labor are now employed. This substitution effect(1) A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product's price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output. decreases the demand for labor. More generally, the substitution effect indicates that a firm will purchase more of an input whose relative price has declined and, conversely, use less of an input whose relative price has increased.

output effect

Because the price of machinery has fallen, the costs of producing various outputs must also decline. With lower costs, the firm finds it profitable to produce and sell a greater output. The greater output increases the demand for all resources, including labor. So this output effectThe situation in which an increase in the price of one input will increase a firm's production costs and reduce its level of output, thus reducing the demand for other inputs; conversely for a decrease in the price of the input. increases the demand for labor. More generally, the output effect means that the firm will purchase more of one particular input when the price of the other input falls and less of that particular input when the price of the other input rises.

net effect

The substitution and output effects are both present when the price of an input changes, but they work in opposite directions. For a decline in the price of capital, the substitution effect decreases the demand for labor and the output effect increases it. The net change in labor demand depends on the relative sizes of the two effects: If the substitution effect outweighs the output effect, a decrease in the price of capital decreases the demand for labor. If the output effect exceeds the substitution effect, a decrease in the price of capital increases the demand for labor.

industrial regulation

pertains to government regulation of firms' prices (or "rates") within selected industries

regulatory agencies

in the few markets where the nature of the product or technology creates a natural monopoly, the government established public regulatory agencies to control economic behavior.

antitrust laws

in most other markets, social control took the form of antitrust (antimonopoly) legislation designed to inhibit or prevent the growth of monopoly.

clayton act of 1914

contained the desired elaboration of the Sherman Act. Four sections of the act, in particular, were designed to strengthen and make explicit the intent of the Sherman Act:

tying contracts

in which a producer requires that a buyer purchase another (or others) of its products as a condition for obtaining a desired product.

interlocking directorate

situations where a director of one firm is also a board member of a competing firm—in large corporations where the effect would be reduced competition.

celler-Kefauver Act

amended the Clayton Act, Section 7, which prohibits a firm from merging with a competing firm (and thereby lessening competition) by acquiring its stock. Firms could evade Section 7, however, by instead acquiring the physical assets (plant and equipment) of competing firms. The Celler-Kefauver Act closed that loophole by prohibiting one firm from obtaining the physical assets of another firm when the effect would be reduced competition. Section 7 of the Clayton Act now prohibits anticompetitive mergers no matter how they are undertaken.

natural monopoly

exists when economies of scale are so extensive that a single firm can supply the entire market at a lower average total cost than could a number of competing firms

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