Exam 3 Study Guide
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.
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
Break-even- the price at which a firm’s total revenue equals its total cost Shutdown- the price that just covers average variable costs
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
Characteristics: products may be differentiated, firms advertise
Product differentiation- distinguishing of products, products can be differentiated by:
- Location motels, gas stations
Similar to PC?
- Demand is horizontal
- In PC, no price influence, in M, some ability to set price
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