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Microeconomics: Unit 3 Vocab
Terms in this set (83)
a market structure in which a large number of firms all produce the same product and no single seller controls supply or prices
a product, such as petroleum or milk, that is considered the same no matter who produces or sells it
barrier to entry
any factor that makes it difficult for a new firm to enter a market
a market structure that fails to meet the conditions of perfect competition
the expenses a new business must pay before it can begin to produce and sell goods
How does perfect competition ensure that prices aren't determined by individual suppliers of consumers?
If a market has many independent buyers and sellers, it is not very likely that large enough groups of either buyers or sellers will work together to bargain for better prices. Instead the market determines price without any influence from individual suppliers or consumers.
Which barrier to entry can be overcome by education or vocational training?
Some markets require a high degree of technological know-how- the knowledge and skills needed to create or repair something. New entrepreneurs cannot easily enter these markets without a lot of preparation and study, but at the same time, preparation and study can help overcome this technological barrier to entry.
How are output decisions made in a perfectly competitive market?
Since no supplier can influence prices in perfectly competitive markets, producers will make their output decisions based on their most efficient use of available land, labor, capital, and management skills.
a market in which a single seller dominates
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
a market that runs most efficiently when one large firm supplies all of the output
a monopoly created by the government
a license that gives the inventor of a new product the exclusive right to sell it for a specific period of time
a contract that gives a single firm the right to sell its goods within an exclusive market
a government-issued right to operate a business
the division of consumers into groups based on how much they will pay for a good
the ability of a company to control prices and total market output
What are three characteristics of a monopoly?
Monopolies have one seller and any number of buyers. A monopoly is also characterized by supplying a unique product. In a monopoly, the good or service provided has no close substitute.
How can technology affect a monopoly?
Sometimes the development of new technology can destroy a natural monopoly. A new innovation can cut fixed costs and make small companies as efficient as one large firm.
What government actions can lead to the creation of monopolies?
The government can issue a patent to a company so that the firm can profit from its own research without competition. It can also issue a franchise to an entrepreneur or a firm, so the product can be sold in a local market exclusively. Governments can also issue a license to grant firms the right to operate a business, especially where scarce resources are involved. In rare cases, the government can even allow the companies in an industry to restrict the number of firms in a market, creating a monopoly.
Where does a monopolist usually set output and price compared with a seller in a perfectly competitive market?
A monopolist sets output at a point where the marginal revenue is equal to marginal cost. In a perfectly competitive market, price and output reach their equilibrium levels.
What three conditions must a market meet in order for price discrimination to work?
Firms that use price discrimination must have some market power, customers must be divided into distinct groups, and buyers must not be in a position in which they can easily resell the good or service.
a market structure in which many companies sell products that are similar but not identical
making a product different from other, similar products
a way to attract customers through style, service, or location, but not a lower price
a market structure in which a few late firms dominate a market
a series of competitive price cuts that lowers the market price below the cost of production
an illegal agreement among firms to divide the market, set prices, or limit production
an agreement among firms to charge one price for the same good and can be an outcome of collusion
a formal organization of producers that agree to coordinate prices and production
How does monopolistic competition differ from perfect competition?
Monopolistically competitive firms sell goods that are similar enough to be substituted for one another but are not identical, as in perfect competition. Monopolistic competition dos not involve identical commodities. And unlike perfect competition, monopolistic competition is a fact of everyday life.
Why is it easy for firms to enter and leave a monopolistically competitive market?
Firms in a monopolistically competitive market do not face many barriers to entry. Patents do not protect anyone from competition. A monopolistically competitive market includes so many competing firms that producers cannot work together to keep out new competitors.
What role does advertising play in monopolistically competitive firms?
Firms often use advertising to point out differences between their own offerings and other products in the marketplace. These product differences are often more a matter of perception than reality. Advertising can also promote nonprice competition through physical characteristics, location, service, style, etc.
What keeps monopolistically competitive firms from making high profits?
Like perfectly competitive firms, monopolistically competitive firms earn just enough to cover all of their costs, including salaries for the workers. If a monopolistically competitive firms started to earn profits well above its costs, fierce competition from other firms and new firms entering the market would work to take those profits away.
What role can market leaders play in an oligopoly?
Sometimes the market leader in an oligopoly can start a round of price increases or price cuts by making its plans clear to other sellers. This firm becomes a price leader.
a business owned and managed by a single individual
the ownership structure of a company or firm
authorization to operate a business issued by a local government
laws in a city or town that designate certain areas, or zones, for residential and business use
the legal obligation to pay debts
payments to employees other than wages or slaary
What is the most common form of business organization?
Sole proprietorships are by far the most popular type of business organization in the United States. More than 70 percent of all businesses are organized as sole proprietorships, however, all together, they only generate about 4 percent of all United States sales.
Why are sole proprietorships easy to start and end?
With just a small amount of paperwork and legal expense, just about anyone can start a sole proprietorship. Typically, sole proprietorships must have authorization, a site permit, and a business name to be able to run. If sole proprietors decide to stop operations and do something else for a living, they can do so easily, after paying all debts and other obligations, such as taxes.
What are the disadvantages of sole proprietorships?
Sole proprietorships have unlimited personal liability, meaning the owner is responsible for all business debts. They also have limited access to resources, and are not permanent, since it can cease to exist if no one is willing to buy or run it after the owner chooses to leave the business and do something else (this can also happen if the owner has an extended illness, dies, or retires).
a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
a type of partnership in which all partners share equally in both responsibility and liability
a type of partnership in which only one member is required to be a general partner
limited liability partnership
a type of partnership in which all partners are limited partners
articles of partnership
a partnership agreement that spells out each partner's rights and responsibilities
the money and other valuables belonging to an individual or business
a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area
the share of earnings given by a franchisee as payment to the franchiser
What is a partnership?
A partnership is a type of business organization that is owned by two or more people who agree on a specific division of responsibilities and profits. In the U.S., partnerships make up nearly 9 percent of all businesses and generate nearly a quarter of all income earned by all businesses.
What are the advantages of partnerships?
Partnerships are easy and inexpensive to establish, requiring no written partnership agreement (only articles of partnership). More than one person contributes assets, so more capital can be raised compared to a sole proprietorship. Partnerships can also attract and keep talented employees more easily than sole proprietorships can. Shared decision making and responsibility is another advantage of partnerships.
How do general partnerships differ from sole proprietorships in terms of control?
In a sole proprietorship, there is only one owner who has full control of the business. However, in general partnerships, each person has only partial control over the firm, and none of them enjoys as much freedom as sole proprietors do.
What are the advantages and disadvantages of franchises?
Advantages of franchises include management training and support, standardized quality, national advertising programs, financial assistance, and centralized buying power. Disadvantages of franchises include high franchising fees and royalties, strict operating standards, purchasing restrictions, and limited product line.
a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm's debts
a certificate of ownership in a corporation
closely held corporation
a type of corporation that issues stock to only a few people, who are often family members
publicly held corporation
a type of corporation that sells stock on the open market
a formal contract issues by a corporation or other entity that includes a promise to repay borrowed money with interest at fixed intervals
certificate of incorporation
a license to form a corporation issued by a state governmnet
the portion of corporate profits paid out to stockholders
limited liability corporation
a type of business with limited liability for the owners, with the advantage of not paying corporate tax
the combination of two or more firms competing in the same market with the same good or service
two or more firms involved in different stages of producing the same good or service
a business combination merging more than thee businesses that produce unrelated products or services
a large corporation that produces and sells its goods and services in more than one country
What is the role of corporate officers?
The owners of a corporation elect a board of directors, which makes all the major decisions of the corporation. It appoints corporate officers, such as the chief executive officer or president. These officers run the corporation and oversee its operations. They, in turn, hire managers and employees, who work in various departments such as finance, sales, research, marketing, and production.
What are the four advantages of incorporating?
Corporations have more potential for growth than than other business forms (They have the opportunity to generate a lot of capital). Corporates can also raise money by borrowing it. Because ownership is separate from the running of the firm, corporate owners do not need any managerial skills. Corporations also have the advantage of long life, since sock is transferable.
What are the disadvantages of incorporation?
Corporations are difficult and expensive to start up. They also receive double taxation- income taxes and personal income tax (for stockholders) on dividends, which keeps many firms from incorporating. The original owners of a corporation may also lose control of the company; the board of directors often takes control instead. Corporations also face more regulations than any other types of businesses.
Why might the government block a horizontal merger?
The federal government watches horizontal mergers carefully the resulting single firm might gain monopoly power in its market. If that is the case, the government might try to block the merger in court. Judges then listen to arguments and read evidence to decide whether to allow the merger.
What are the advantages and disadvantages of multinational corporations?
Multinationals benefit consumers and workers by providing jobs and products around the world. Often the jobs they provide help people in poorer nations enjoy better living standards. On the downside, many people feel that multinational firms unduly influence the culture and politics in the countries in which they operate.
a business organization owned and operated by a group of individuals for their shared benefit
a retail outlet owned and operated by consumers that sells merchandise to members at reduced
a type of cooperative that provides a service rather than a good
an agricultural marketing cooperative that helps me every sell their products
an institution that functions much like a business, but does not operate for the purpose of generating profit
a nonprofit organization that works to improve the image, working conditions, and skill levels of people in particular occupatiosn
a group organized to promote the collective business interests of an area of group of similar businesses
nonprofit organizations that promote the interests of particular industries
How do members benefit from cooperatives?
Consumer co-ops benefit members by selling merchandise to them at reduced prices. They purchase a lot of goods at a lower cost and pass the savings in my setting prices low. Service co-ops can offer services at a low price or discounted. People deposit money into credit unions, a type of service co-op. The credit unions use those funds to lend money to members at reduced rates. Producer co-ops help members sell their products. These co-ops allow members to focus their attention on growling their crops or raising their livestock.
How are nonprofit organizations similar to and different from corporations?
Nonprofit organizations function much like business organizations, but do not operate for the purpose of generating profit. They are usually in the business of benefiting the public. Nonprofits cannot issue stock, unlike corporations. They are also exempt from income taxes.
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