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AAE 215 FINAL
Term | Definition |
---|---|
Pure Monopoly | One seller, no close substitutes, price maker, entry barriers strong, little nonprice competition |
Economies of Scale | Having one large firm is more efficient |
Monopoly Demand | Firm is the industry D curve is downsloping |
Monopoly MR | Decreasing Always twice as steep as D curve |
Pure Comp MR | Constant |
Price in Monopoly | P is on D curve above where MR=MC Set in elastic region MR < P |
Profit Maximizing Point Monopoly | MR=MC |
Highest Price in Monopoly | Not what is charged. Can't sell enough at highest possible price |
Monopoly Total Profit | Lower per unit profit, sell more units to get higher total profit |
Monopoly Vulnerability | Possibility of losses, vulnerable to changes in D and cost |
Economic Efficiency of Monopoly | Less efficient than Pure Comp DWL |
X Efficiency | Production costs are higher than necessary costs Internally driven inefficiency No competitors so costs are driven |
Network Effects | More users = more benefit for other users |
Rent Seeking Behavior | Monopolies seek government subsidies, etc. Inefficient resources used on lobbying |
Antitrust Laws | Break up firm that is harmful to competition Done by government |
Government Regulation of Monopoly | Government determines price and quantity, regulation Can also ignore and let times and markets get rid of monopoly |
Price Discrimination | Charging different buyers different prices that aren't based on cost differences |
Price Discrimination Conditions | Must have monopoly power, market segregation (identify different buyers and separate consumers based on WTP), no resale (low buyer can't buy and sell at higher price) |
Price Discrimination Examples | Business travel D inelastic, can't wait so P increases |
Socially Optimal Price in Monopoly | Set price=MC Most efficient, but might cause losses for company. Would need subsidies |
Fair Return Price Monopoly | P = ATC Not allocative efficiency, but break even (fair return) for business |
Monopolistic Competition | Relatively large number of sellers |
Product Differentiation in Mono Comp | Power to set the price w/unique product |
Nonprice Competition in Mono Comp | Used considerably, emphasis on advertising and brand |
Demand in Mono Comp | Demand is highly elastic, but not perfectly elastic |
Short Run Profit/Loss in Mono Comp | If ATC higher than MR, profit If ATC higher than D and MR then losses |
Long Run in Mono Comp | Zero economic profit (normal profit) Entry and exit |
Mono Comp and Efficiency | Inefficient, produces where costs are higher than ATC (productive inefficiency) Produces at P > MC, so allocative inefficiency |
Product Variety in Mono Comp | Firms constantly managing price, product and advertising Better product differentiation and advertising means more money Consumer benefits by greater array of choices and better products |
Profit Maximizing Point Mono Comp | Find MR=MC, then go up and find where that intersects D |
Oligopoly | A few large producers |
Homogeneous Oligopoly | Essentially identical products Zinc, Steel, Copper, etc. |
Differentiated Oligopoly | Cars, cereals, tires, etc. Limited control over price since they have to worry about rivals |
Strategic Behavior in Oligopoly | Mutual interdependence (actions by one firm impact the other) Strategic Pricing Collusion (cooperate rather than compete w/rivals) Game Theory |
Prisoner's Dilemma | Best outcome if both are silent, but their must act independently Independent actions stimulate response |
Kinked Demand Oligopoly | Non-Collusive Uncertain about rivals reaction (rivals match price changes when it's a dec, ignore when they inc) Kinked since firms follow price dec |
Criticisms of Kinked Demand | Explains inflexibility but not price, assumes P is established Prices aren't really that rigid Price war (competition for lower prices) |
Cartels and Other Collusion | If identical and similar D and costs, firms collude Increase efficiency and set price Optimizes firm's profits Most often homogeneous products |
Obstacles to Collusion | D and cost differences between firms Number of firms Cheating Recession New entrants Legal obstacles |
Price Leadership Model | Dominant firm initiates price change, and other firms follow Match P to keep market share the same Leads to stability Pricing can be used to block entry of new firms |
Price Leadership Model Problems | Possible price war (if dominant firm raises P too much, others can undermine) Dominant firm may get caught in collusion and in legal trouble Model won't work in recession |
Oligopoly and Advertising | Common to compete through advertising and product development Less easily copied by rivals compared to P change Creates product loyalty Financially, firms can afford to advertise |
Pros of Advertising- Oligopoly | Low cost way of providing product info to consumers Enhances competition Speeds up tech progress Helps firms obtain economies of scale (lowers LR ATC) |
Cons of Advertising - Oligopoly | Can be manipulative and have misleading claims Can increase TC (higher price for consumers) Consumers can forgo better product in favor of better advertised one |
Oligopoly and Efficiency | Inefficient, productively (P> min ATC) and allocatively (P> MC) |
Oligopoly Qualifications | Inc in foreign competition (forces more efficiency to remain competitive) Limit prices Tech advances |
Commodity Consumption | Supply has risen higher than D and prices continue to fall due to oversupply |
Resource Sustainability | Resource consumption will peak and fall w/birth rates Resource consumption per capita has dec/leveled off |
Resource Consumption Per Person | Leveled off in rich countries D will inc in poor countries Challenge is to move resource supplies from place of origin to place of D |
Energy Economics | Energy efficiency is increasing Highly variable D Uninterrupted service expected Variations in FC Optimal strategy is to combine different types of generation tech |
Environmental Impacts of Energy | Externalities for fossil fuels Alternatives can help, but they have their own issues |
Negative Externalities in Energy | Energy generation creates pollution that pollutes the atmosphere |
Negative Externalities Policy Options | Social costs of electricity production exceed private production costs Too much pollution |
How to Lower Pollution? | Quantity based approach (government sets limit on amount of emissions plant can produce) Price based (tax levied for each ton produced. Inc costs, incentives improvement). Like Carbon Tax |
Environmental Kuznets Curve | Idea that as countries get wealthier, the enviro impact inc, but then dec Criticized for understating global impact |
Natural Resource Economics | Policies for extracting resources to max net benefits (Net Rev-TC) |
Resource Management | Present vs. Future Consumption Present value Extraction strategy to maximize profits |
User Cost | Opportunity cost of using resources today Putting opportunity cost in today's dollars |
Higher expected D... | Encourages less extraction today |
Natural Resource Per Unit Profit | P-TC |
ITQs | Individual Transfer Quotas Limits amount of individual catch Market pressures mean these are sold to those w/lowest cost Eliminates ineffiicency |
Farm Demand | Inelastic D |
Shifts in D Effect on Ag Prices and Income | Shift in D causes large change in P and farm income |
Fluctuations in P and Ag Income | Due to inelastic D combined w/changes in output, shifts/changes in D, and changes in D |
Changes in D of Ag Products | D sensitive to foreign markets (weather/crop production abroad) Foreign economic policies (protectionist policies home and abroad) |
US Farm Exports | SR inconsistencies LR growth |
Long Run: Declining Industry | Ag output and productivity are growing Employment and some inputs going down (tied to pop growth) Smaller share GDP (ag is growing, other sectors are growing faster) LR decline of ag prices and farm income |
Decline of Farm P and Income | D inc slowly, and is inelastic w/respect to income Slow population growth |
Major Consequences of Dec in Farm Income and P | Inc minimum efficient scale Consolidation Agribusiness Massive exit of workers Farm household income (used to be lower, now higher than normal) |
US Employment and Farm Number | Less farms, less employees Decrease in MES |
Minimum Efficient Scale | Output at which long run ATC is minimized Lowest point on LR ATC curve Low MES = market w/lots of small producers |
Economics of Farm Policy | Subsidized since 1930s: support for ag prices, income, and output, Soil and water conservation, ag research, farm credit, crop insurance, etc. |
Economics of Price Supports | Binding price floor above equilibrium price. Purchase any unsold supply Creates surplus Gain to farmers (higher incomes), loss to consumers (higher price) Overallocation of resources |
Milk Price Supports | Price floor -> surplus Government buys and stores or sells at a loss |
Sugar Price Supports | Higher P for consumers inefficient resource use |
Rationale for Farm Subsidies | Necessity of life, Family farm institutions, extraordinary hazards (risk management), Comp market for outputs while inputs have considerable market power (inputs can exploit farmers) |
Alternative to Price Supports | Reduce/Restrict Supply (acreage allotments/conservation). Conserve land/more sustainable land use Increase Demand (new uses for ag outputs, stimulate consumption (food stamps, export promotion, etc.)) |
Criticisms of Price Supports | Generate surplus, tax burden, overall supply Address symptoms, not policy and causes Misguided subsidies (given per bushel, so biggest farms get the most, and small farms get least) |