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Terms in this set (52)
An industry in which there is only one supplier of a product for which there are no close substitutes and in which it is very difficult or impossible for another firm to coexist
What is pure monopoly?
Legal restrictions, patents, control of a scarce resource or input, deliberately - erected entry barriers, large sunk costs, technical superiority, and economies of scale
What are the sources of a monopoly?
For sources of monopoly, an example of a legal restriction is what?
A privilege granted to an inventor for a specific period of time prohibits anyone else from producing that invention
For sources of monopoly, what is a patent?
Lawsuits against rivals that try to entry
For sources of monopoly, what is an example of a deliberately - elected barrier?
High sunk costs, in aerospace, vehicle industries
For sources of monopoly, what are high sunk costs?
Sometimes size gives a large firm advantages over another firm
For sources of monopoly, what is economies of scale?
An industry in which advantages of large scale production make it possible for a small or single firm to produce the entire output of the market at lower average costs than a number of firms each producing a smaller quantity
What is a natural monopoly?
Small bank in a rural town
What is an example of a monopoly?
The size of a single firm relative to the total market demand of a product
What really matters for a monopoly?
The more a firm in this industry produces, what will be lower?
Output is apt to grow larger (2.5M), so its average cost will fall to point C.
Firm A will drive Firm B out of business, and once Firm A's monopoly is established, its:
Select both price and quantity
The market cannot impose a price on a market as it imposes a price on the PC firm but the market cannot:
The less it will sell
In accord with the D curve, the higher the price it sets:
A m's profits persist, while a PC firm earns 0 economic profits in long run
Comparing M and PC (1)
M restricts output to raise price
Comparing M and PC (2)
M restricts output to raise price in the long run
Comparing M and PC (3)
M leads to inefficient resource allocation
Comparing M and PC (4)
Monopoly may aid in what?
Demand and cost curves
Monopoly is likely to shift what?
Price discrimination is the sale of a given product at different prices to different customers of the firm when there are no differences in the cost of supplying these customers
What is price discrimination?
Because it is protected from entry, a monopoly firm may earn positive economic profits - that is, profits in excess of the opportunity cost of capital. At the same time, monopoly breeds inefficiency in resource allocation by producing too little output (Q) and charging too high a price (P1)
For what reasons do some of the virtues of the free market evaporate if an industry becomes monopolized
freedom of entry and exit, perfect information, and heterogeneous products
Monopolistic competition characterized by what 4 requirements?
Retail (shoe stores/ restaurants/ etc.)
What is an example of a monopolistic competition?
Most firms in the U.S. are what?
What firms represent the greatest share of GDP?
Drive some of its customers to competitors
If a MC firm raises its price it will:
The firm will tend to produce an output lower than that which minimizes its units costs and hence its unit costs will be higher than necessary leaving monopolistic competitive firms to have wasted or unused capacity
Under monopolistic competition in the long run:
Economic profits greater than zero cannot persist in the long run because it will entice new firms to enter the market with close substitutes, this will shift the D curve downward until P=AC=$2.85 and econ profits= 0
The excess capacity theorem and resource allocation
Monopolistic competition is associated with what?
Lower that minimizes its unit costs and hence its unit costs will be higher than necessary - leading firms to have wasted, excess, or unused capacity
Under MC, in the long run a firm will tend to produce an output:
A market dominated by a few sellers, at least several of which, are large enough relative to the total market to be able to influence price
What is an oligopoly?
Military strategy (firms are interdependent)
Oligopoly is like a:
Auto industry, aerospace, steel
Examples of oligopoly:
Rivalry among firms takes its most direct and active form
Frequent new product intros, aggressive ad campaigns and pricing, daily strategies sessions
What do oligopolies do?
What do oligopolies spend a lot of money on?
To survive and thrive in an oligopolistic industry, firms must take account of rival's responses. This makes it very difficult to predict the outcome of an action. At other times oligopolistic firms have engaged inclusion on prices (illegal part but punishment isn't always given).
Why is oligopolistic behavior so different to analyze?
Not a good strategy and oligopolistic firm just seeks to maximize profit
What is ignoring interdependence?
What most o firms do, namely, not ignore rivals' responses and plan for it through tactics, moves and counter-moves
What is strategic interaction?
A group of sellers of a product who have joined together to sell its production, sales, and price in the hope of obtaining the advantages of monopoly
What are cartels?
No more than the output assigned to them. As prices rise they want to cut price to raise quantity sold, for this reason firms spy on each other to insure compliance
In a cartel, members agree to produce what?
over price collusion: illegal (common), Tazit price collusion, firms, w.o. meeting, signal their intention to one another to change price
Price leadership and collusion under oligopoly:
Means you maximize sales not profit and firms ignore interdependence
What is strategy maximization?
Seeks to adopt prices and output that maximize total revenue rather than profit
What does a firm do when doing a strategy maximization?
Shows why oligopolistic prices are sticky and do not change unless have a major cost change that pushes the marginal cost curve out B-C range
What is a kink demand curve?
Shows how much each of 2 competition can expect to earn depending on the strategic choices each makes
What is a payoff matrix?
Most widely-used in oligopoloy
The game theory approach is:
Yield a higher payoff than any other strategy, no matter what strategy choice is made by competition
A payoff matrix is a dominant strategy that will:
Production targets for firms and producers and tells them how to produce, consumers may be told what they are allowed to consume
A central planned economy sets:
Coordinate economic activity
In contrast, a market system uses prices to:
The scarecest resources and where possible, induced expansion on their supplies; where as low prices encourage consumption of comparatively abundant resources
High prices discourage consumption of:
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