Econ Test 4 Flashcards

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Questions and Answers

Which of the following are characteristics of a company in perfect competition? (Select all that apply)

Many buyers and sellers (correct)

Price makers

Identical products (correct)

Significant barriers to entry

What are the main characteristics of a company in a monopoly?

Single seller, price maker, has control of the market.

Oligopolies experience high advertising and selling costs.

True

What does collusion in an oligopoly mean?

Firms agree to jointly act in pricing and other business matters. Signup and view all the answers

In which market structure do McDonald's, Starbucks, and Dunkin Donuts compete?

Monopolistic Competition Signup and view all the answers

What are barriers to entry in a monopoly?

Product differentiation, government regulations, exclusive franchise rights, tariffs, and quotas. Signup and view all the answers

What types of mergers are there?

All of the above Signup and view all the answers

Define product differentiation.

Accentuating unique product qualities to develop a specific product identity. Signup and view all the answers

Price takers operate in monopolistic competition.

False Signup and view all the answers

What is market segmentation?

Dividing consumers into groups. Signup and view all the answers

Which of the following describes predatory pricing?

Pricing deliberately kept low to harm competition Signup and view all the answers

What is the meaning of price rigidity?

The resistance of a price to change despite changes in economic conditions. Signup and view all the answers

What is the difference in economic profits between perfect competition and monopoly?

In perfect competition, economic profits are short-lived due to new entrants, while in monopoly, profits can persist due to barriers to entry. Signup and view all the answers

What is the goal of antitrust laws?

Promote competition Signup and view all the answers

Define game theory in the context of oligopoly.

A framework for understanding competitive interactions that minimize losses from opponents' actions. Signup and view all the answers

Match the following terms with their descriptions:

Price takers = Buyers and sellers who accept market prices Price makers = Firms that can influence prices Oligopoly = Market with a few large firms Monopolistic competition = Many firms selling differentiated products Signup and view all the answers

Study Notes

Characteristics of Perfect Competition

Many buyers and sellers act as price takers.
Firms sell identical (homogeneous) products.
Easy market entry and exit with no significant barriers.

Characteristics of Monopoly

A single seller controls the market and acts as a price maker.
Example: U.S. Postal Service faces competition but remains dominant in standard mail processing.

Characteristics of Oligopolies

Firms are interdependent in decision-making processes.
High costs associated with advertising and selling.
Potential for price rigidity and stickiness in the market.

Collusion in Oligopoly

Firms collaborate on pricing and business strategies to stabilize profits.

Market Competition of Fast Food Chains

McDonald's, Starbucks, and Dunkin’ Donuts compete in a monopolistically competitive market.

Nature of Cartels

A cartel is a group of businesses that operate as a single entity to control market output and pricing.
Example: OPEC manages oil production and pricing through collective agreements.

Barriers to Entry by Market Structure

Monopoly: faces barriers like patents, exclusive licenses, and tariffs.
Perfect Competition: no significant barriers to entry.
Oligopoly: includes government regulation and control over key inputs.

Types of Mergers

Horizontal: firms in the same industry merge (e.g., two hotels).
Vertical: firms from different supply chain stages merge (e.g., a hotel merging with a mattress producer).
Conglomerate: firms in unrelated sectors merge (e.g., a hotel with a car manufacturer).

Product Differentiation

Firms emphasize unique product features to create brand identity, based on real or perceived differences.

Market Segmentation, Pricing Power, and Collusion

Market segmentation involves dividing consumers into distinct groups for targeted marketing strategies.
Pricing power refers to the ability of a firm to influence its product price in response to demand.
Collusion represents illegal agreements between competitors to manipulate market practices.

Definition of Oligopoly

A market structure characterized by a few firms that dominate production, exhibiting mutual interdependence.

Price Takers vs. Price Makers

Price takers: operate in perfectly competitive markets where they accept market prices.
Price makers: operate in monopolistic or oligopolistic markets, able to influence their prices.

Types of Oligopolists

Firms can either differentiate their products or not, found in industries like airlines and consumer goods.

Number of Firms in Different Markets

Perfect Competition: infinite number of firms.
Monopolistic Competition: one firm dominates.
Oligopolistic Competition: a small number of firms.

Barriers to Entry and Market Types

Perfect competition: easy entry.
Monopolistic competition: legal barriers restrict entry.
Oligopoly: significant costs and challenges for new entrants.

Antitrust Laws

Aim to prevent monopolistic practices and promote competition.
Address predatory pricing, price discrimination, and tie-in sales.

Examples of Price Discrimination

Examples include varying prices for utility services, airline tickets, and discount offers.

Conditions for Price Discrimination

Requires market power, effective market segmentation, and difficulty reselling products.

Market Segmentation Concepts

Includes dividing consumers into categories that can be targeted with distinct marketing strategies.

Price Effect in Monopolistic Competition

To sell additional units, monopolists must lower prices, impacting total revenue negatively.

Definition of Monopolistic Competition

A market structure with many producers of differentiated products, allowing some degree of market power.

Price Rigidity and Stickiness

Reflects reluctance of firms to change prices in response to market conditions, resulting in price stability.

Profit Maximization in Firms

Determined by analyzing total revenue, average revenue, and marginal revenue to identify optimal pricing and output.

Role of Advertising

Shifts demand curves and raises consumer awareness, sometimes utilizing celebrity endorsements.

Cost Dynamics in Industries

Constant costs: inputs remain stable as production expands.
Increasing costs: rising expenses as industry output increases.
Decreasing costs: reduced costs as industry expands production capabilities.

Efficiency Concepts

Productive efficiency: firms minimize production costs.
Allocative efficiency: production aligns with consumer preferences.

Price Determination Economics

Prices are influenced by competition rather than strictly by production costs.

Examples of Perfect Competition

Notable markets include airline fares, online marketplaces, and agricultural products, operating on competitive pricing.

Elements of Perfectly Competitive Markets

Features perfect knowledge availability, no entry barriers, homogeneous products, and the price-taking firm behavior.

Short Run Profits and Losses

Firms may not always achieve profits by maximizing output; they must also consider variable costs.

Long Run Equilibrium Implications

Profitable industries attract new firms, leading to a competitive adjustment that eliminates economic profits.

Long Run Supply Conditions

Industry output changes can affect cost structures, with industries categorized as constant, increasing, or decreasing cost.

Demand and Marginal Revenue in Monopoly

Demand curves are downward sloping, limiting simultaneous control over price and quantity by monopolists.

Economic Profits Contrast

In perfect competition, short-term profits attract new entrants, while monopolies can maintain long-term profits due to barriers.

Monopoly and Welfare Loss

Monopolies can cause inefficiencies, leading to higher prices and reduced output compared to competitive markets.

Short Run Equilibrium in Monopolistically Competitive Markets

Economic profits and marginal revenues define firm performance and pricing strategies.

Long Run Equilibrium Adjustments

New entrants in an economic profit scenario will drive demand elasticity and reduce existing firms' profits.

Monopolistic vs. Perfect Competition

Key differences include market power, potential for excess capacity, and productive efficiencies across structures.

Long Run Dynamics of Oligopoly

Firms may charge higher prices and produce lower outputs than socially optimal, impacting overall welfare.

Division of Profits in Oligopoly

Profit sharing relies on factors like bargaining power, financial strength, and market perception.

Game Theory in Oligopoly

Firms strategize to mitigate competitive damage through alternative actions, often informed by rival moves.

Cooperative vs. Non-Cooperative Games

Cooperative games involve collusion between firms, while non-cooperative games feature independent price-setting.

Prisoner's Dilemma Concept

Illustrates the challenges faced by non-colluding oligopolists while navigating competitive strategies.

Payoff Matrix in Game Theory

Describes outcomes of strategies in games, showcasing the consequences of cooperation or betrayal among players.

Long Term Strategies in Oligopoly

Interactions are often repeated; firms adopt strategies like tit-for-tat to maintain competitive advantage.

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Description

Test your knowledge on the characteristics of market structures in economics, including perfect competition and monopoly. These flashcards are designed to help reinforce your understanding of key concepts and definitions. Ideal for students preparing for their economics exams.