ECON101 Study Guide
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This 3 page Study Guide was uploaded by Michael Notetaker on Thursday February 4, 2016. The Study Guide belongs to ECON101 at University of Delaware taught by Odobasic, Aida in Spring 2015. Since its upload, it has received 48 views.
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Date Created: 02/04/16
Ryan Cleary Midterm 3 Review Chapter 11 Long-run in pure competition-firms can enter/exit the industry, firms can expand or contract capacity o Firms enter if P>ATC, and return P=ATC because an increase in supply lowers prices and they fall until they equal ATC o Firms exit if P<ATC, and return to P=ATC because a decrease in supply raises prices and they rise until they equal ATC o Firms only can break-even in the long-run and incur an economic profit of 0 For a firm to stay competitive, it must produce at minimum ATC which will equal price Profits and losses can only occur in short-run because in the long- run price always equals ATC in pure competition o If graph shows P ATC, then the graph is of the short-run Constant-cost industry-entry and exit does not affect the long-run ATC of other firms, constant resource prices, special case Increasing-cost industry-long-run ATC for all firms increases with addition of new firms, up-sloping ATC/supply, specialized resources, most industries, market price increases with increased demand (ex. gold mining, oil) Decreasing-cost industry-long-run ATC decreases with expansion, down-sloping ATC/supply, market price decreases with increased demand (ex. technology) Efficiency in Pure Competition o Productive efficiency-holds only in long-run, producing where P=min. ATC o Allocative efficiency-holds only in long-run, producing where P=MC o Triple equality-P=MC=min. ATC o Consumer and producer surplus are maximized Purely competitive firms are able to adjust to changes in demand over time “Invisible Hand” Creative destruction-creation of new products and methods may destroy the old products and methods (ex. ice was delivered, but now is available in all fridges) Chapter 12 Pure monopoly-single seller that is the single producer, no close substitutes, price maker, blocked entry, non-price competition (ex. natural gas, cable, sports teams) Barriers to entry o Economies of scale-increased output leads to lower ATC, cheaper for one firm to produce for the industry as opposed to multiple o Legal barriers such as licenses or patents (pharmaceuticals, liquor stores) o Ownership and resource control (owning all the land diamonds are found) o Driving others out of the market by beating their price strategically taking loss for a period of time Demand curve for the industry is the demand curve for a monopoly Marginal revenue is less than the price for monopoly because to increase quantity supplied the monopoly must lower prices and take a price cut on the previous units to sell more units, some potential TR is lost Monopolist will never set price in inelastic region because by decreasing price, the TR would decrease, in the elastic region a price increase will raise TR, the elastic region occurs where MR>0 Output will occur where MR=MC and at the corresponding price on the demand curve Efficiency lost occurs between the points where MR=MC, MC=D, and point on the demand curve that directly above MR=MC Government action on monopoly o Antitrust laws-break up the firm into smaller firms (Andrew Carnegie and Standard Oil Trust) o Regulate-government sets limits on price and output o Ignore-let time and the market get rid of the monopoly Price discrimination-charging different prices to different groups of people, based on different elasticity of groups Conditions o Monopoly power-must have absolute power of the price and no close substitutes o Market segregation-must be distinct groups in which its easy to discriminate (ex. students, seniors, time of purchase) o No resale-the product cannot be turned around and sold by the group charged the lower price to the group charged the higher price o Examples-business travel vs. vacationers, electric utilities, movie theatres (seniors get discount, during the day is cheaper than at night), coupons (people have time to clip coupons have time to shop around and find the best deal) o Higher price is charged to those with inelastic demand (ex. Microsoft-students have other access to their software on school computers and are given discount while business must have the software and their demand is inelastic and they will buy no matter the price and for Microsoft it doesn’t cost any more to produce an additional unit for the students so they increase profit) Chapter 24.2 Nations have different endowments o Labor-intensive goods-has a lot of people to produce goods (China) o Land-intensive goods-has a lot of land to produce goods (Australia) o Capital-intensive goods-has a lot of capital to produce goods (U.S. and Germany) Opportunity cost ratio-ratio of the sacrifice of production of one good for a different good Absolute advantage-ability to produce a good in the most efficient way Comparative advantage-ability to produce a good sacrificing less than other country Countries produce the good with the lowest domestic opportunity cost Terms of trade-the terms agreed upon by both countries that they will exchange the two goods for between the domestic opportunity of the two countries Trading leads to more efficient allocation of resources, more of both product is being produced than if there were no trade Complete specialization doesn’t occur because in the real world there are increasing opportunity costs Trading shifts outward the production possibility curves for the good that they aren’t specializing in Differences between pure competition and pure monopoly M-price maker C-price taker M-demand for industry is the monopolists demand, down-sloping C-horizontal demand, different from industry M-profits can be earned in SR and LR C-profits can only be earned in SR M-efficiency is lost C-efficiency is maximized M-MR is less than demand and price C-MR=P=D
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