Exam 3 Study Guide

What are the characteristics of perfect competition?

Consumer surplus: difference between the willingness to pay (value) and  the price actually paid for the good.

Producer surplus: the difference between the price the good is sold at and  the lowest price the producer would have been wiling to sell the good at.  

Deadweight loss: this is consumer surplus or producer surplus that  disappears and is transferred to nobody. If deadweight loss exists, the market is not operating efficiently.  

Price ceiling- in terms of CS and PS, a price ceiling will typically increase CS and decrease PS, CS will increase if K > M.

Price floor- in terms of CS and PS, a price floor will typically increase PS and decrease CS, PS will increase if V > Z.

 PERFECT COMPETITION 

Why oligopoly occurs?

A market structure in which the decisions of individual buyers and sellers  have no effect on market price  

What are characteristics?  

∙ Large number of buyers and sellers

∙ homogenous product (goods are perfect subs)

∙ Perfect price info for everyone  

∙ No barriers to entry or exit

Examples: farming and commodities (corn, wheat), stock market In competitive market, each firm will have little or no market power

In non-competitive markets, an individual firm will have a lot of market  power

Profit= q* x [P*-ATC(q*)]

Profit maximization occurs at output (q) where:

- The gap between TR and TC is the biggest  

Why do firms price discriminate?

- MR=MC

Break-even- the price at which a firm’s total revenue equals its total cost Shutdown- the price that just covers average variable costs

MONOPOLY 

A market containing a single firm We also discuss several other topics like Who created standards businesses must follow to keep the workplace safe?

Entry barrier- any barrier to the entry of new firms into the industry

- Entry barriers makes it difficult for other firms to enter and compete,  because a new firm usually starts by producing a low output level with  high average costs (natural monopoly)

Profit max= Q* at MR=MC, P> MR=MC, compared to perf. Comp. P=  MR=MC Don't forget about the age old question of What is the significance of “perceived control” on health?
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Price discrimination: occurs when a firm sells identical units of  output at different prices for reasons not associated with costs EXAMPLES OF PRICE DISCRIMINATION: senior citizen, kids,  military, reduced lunch, college tuition

Why do firms price discriminate?  

- Attract new consumers

- Increase profits

Arbitrage occurs when a consumer buys goods at a low price and resells the  goods at a higher price to other consumers. Thus, the surplus would go to  this enterprising consumer, and not the firm

MONOPOLISTIC COMPETITION: 

Characteristics: products may be differentiated, firms advertise

Product differentiation- distinguishing of products, products can be  differentiated by:

- Brand

- Quality  

- Location  motels, gas stations

Similar to PC?

- Demand is horizontal

- In PC, no price influence, in M, some ability to set price

OLIGOPOLY: 

Characteristics? Small number of large firms, each firm will make up a  sizeable percent of the market, interdependence

Why it occurs?

- Economies of scale- larger firms more efficient=less firms in the  industry

- Barriers to entry- difficult for new competitors to enter - Mergers- smaller firms combine into one larger firm  We also discuss several other topics like Define cultural anthropology.
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Concentration ratio- the percentage of all sales contributed by the  leading four or leading eight firms in an industry.

Collusion- firm acting together to restrict production or increase prices

Network effects- a situation in which a consumer’s willingness to  purchase a good or service is influenced by how many others also buy or  have bought the item If you want to learn more check out It is a movement of water due to a gradient. what is it?

Multiproduct firms- a firm that produces and sells two or more different  items  

Examples? Cereal, soft drinks