Microeconomics Finals PDF

MICROECONOMICS CHAPTER 6: Production Production The theory of the firm describes how a firm makes cost-minimizing production decisions and how the firm’s resulting cost varies with its output. Production Decisions of a Firm The production decisions of fir...

MICROECONOMICS CHAPTER 6: Production Production The theory of the firm describes how a firm makes cost-minimizing production decisions and how the firm’s resulting cost varies with its output. Production Decisions of a Firm The production decisions of firms are analogous to the purchasing decisions of consumers, and can likewise be understood in three steps: ○ Production Technology ○ Cost Constraints ○ Input Choices Factors of Production ○ Inputs into the production process (e.g., labor, capital, and materials). The Production Function Function showing the highest output that a firm can produce for every specified combination of inputs. ○ Remember the following: Inputs and outputs are flows. In economics and production, a flow refers to a measure of something (such as inputs or outputs) that occurs over a period of time, as opposed to being measured at a single point in time (which would be called a "stock"). Flows help describe dynamic processes, like how much is produced, consumed, or utilized within a specific timeframe. Inputs like labor, raw materials, or energy are considered flows because they are consumed over time to produce goods or services. Outputs, like goods or services, are also flows because they are produced and delivered over time. Inputs and outputs are flows because they are measured over a period of time (e.g., labor hours per week or units produced per day) rather than as static quantities (stock). This equation applies to a given technology. q = F(K,L) ○ Here, q represents the output, K is capital (e.g., machines), L is labor, and F(K,L) is the production function. The equation assumes that the technology available to the firm remains constant.  Example: If technology improves (e.g., better machines), the same inputs may produce more output, changing the production function. Production functions describe what is technically feasible when the firm operates efficiently. The Short Run versus the Long Run Short Run ○ Period of time in which quantities of one or more production factors cannot be changed. Period in which at least one factor of production is fixed and cannot be changed Fixed Input ○ Production factor that cannot be varied. Long Run ○ Amount of time needed to make all production inputs variable. Average and Marginal Products Average Product ○ Output per unit of a particular input. Average product of labor = Output/labor input = q/L Marginal Product ○ Additional output produced as an input is increased by one unit. Marginal product of labor = Change in output/change in labor input = Δq/ΔL The Law of Diminishing Marginal Returns Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease. ○ central to the thinking of political economist Thomas Malthus Labor Productivity Average product of labor for an entire industry or for the economy as a whole Productivity and the Standard of Living Stock of Capital ○ Total amount of capital available for use in production. Technological Change ○ Development of new technologies allowing factors of production to be used more effectively. Isoquant Curve showing all possible combinations of inputs that yield the same output. Isoquant Map Graph combining a number of isoquants, used to describe a production function. Substitution Among Inputs Marginal Rate of Technical Substitution (MRTS) ○ Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. MRTS = − Change in capital input/change in labor input = − ΔK/ΔL (for a fixed level of q) ○ When the isoquants are straight lines, the MRTS is constant. Production Functions—Two Special Cases Fixed-Proportions Production Function ○ Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output. The fixed-proportions production function describes situations in which methods of production are limited. Real-World Example: Construction Projects: Building a wall might require a fixed ratio of bricks (capital) and masons (labor). If you have surplus bricks but no masons, the wall cannot be built faster. Electric Cars: Producing an electric vehicle might require a specific number of battery cells and motors. If one component is lacking, production halts. Returns to Scale Returns to Scale ○ Rate at which output increases as inputs are increased proportionately. Returns to Scale refers to how the output of a production process changes when all inputs (like labor and capital) are increased proportionately. It helps in understanding the efficiency and scalability of a firm's production as input levels are scaled up. Increasing Returns to Scale ○ Situation in which output more than doubles when all inputs are doubled. When all inputs are doubled, the output increases by more than double. However, when there are increasing returns to scale, the isoquants move closer together as inputs are increased along the line. Constant Returns to Scale ○ Situation in which output doubles when all inputs are doubled. When all inputs are doubled, the output increases by exactly double. When a firm’s production process exhibits constant returns to scale, the isoquants are equally spaced as output increases proportionally. Decreasing Returns to Scale  ○ Situation in which output less than doubles when all inputs are doubled. When all inputs are doubled, the output increases by less than double. CHAPTER 7: The Cost of Production Economic Cost versus Accounting Cost Accounting Cost ○ Actual expenses plus depreciation charges for capital equipment. Economic Cost ○ Cost to a firm of utilizing economic resources in production, including opportunity cost. Opportunity Cost ○ Cost associated with opportunities that are forgone when a firm’s resources are not put to their best alternative use. Sunk Cost ○ Expenditure that has been made and cannot be recovered. ○ Because a sunk cost cannot be recovered, it should not influence the firm’s decisions. Fixed Costs and Variable Costs Total Cost (TC or C) ○ Total economic cost of production, consisting of fixed and variable costs. Fixed Cost (FC) ○ Cost that does not vary with the level of output and that can be eliminated only by shutting down. Variable Cost (VC) ○ Cost that varies as output varies. The only way that a firm can eliminate its fixed costs is by shutting down. ○ Shutting Down Shutting down doesn’t necessarily mean going out of business. By reducing the output of a factory to zero, the company could eliminate the costs of raw materials and much of the labor. The only way to eliminate fixed costs would be to close the doors, turn off the electricity, and perhaps even sell off or scrap the machinery. ○ Fixed or Variable? How do we know which costs are fixed and which are variable? Over a very short time horizon—say, a few months—most costs are fixed. Over such a short period, a firm is usually obligated to pay for contracted shipments of materials. Over a very long time horizon—say, ten years—nearly all costs are variable. Workers and managers can be laid off (or employment can be reduced by attrition), and much of the machinery can be sold off or not replaced as it becomes obsolete and is scrapped. Fixed versus Sunk Costs Sunk costs are costs that have been incurred and cannot be recovered. An example is the cost of R&D to a pharmaceutical company to develop and test a new drug and then, if the drug has been proven to be safe and effective, the cost of marketing it. Whether the drug is a success or a failure, these costs cannot be recovered and thus are sunk. Amortizing Sunk Costs Amortization ○ Policy of treating a one-time expenditure as an annual cost spread out over some number of years. Example: If a company spends $1 million on research and development (R&D) for a product, it may amortize this expense over 5 years, treating it as $200,000 per year instead of a lump sum. Marginal Cost (MC) Increase in cost resulting from the production of one extra unit of output. Because fixed cost does not change as the firm’s level of output changes, marginal cost is equal to the increase in variable cost or the increase in total cost that results from an extra unit of output. We can therefore write marginal cost as ∆𝑉𝐶 ∆𝑇𝐶 ○ 𝑀𝐶 = ∆𝑞 = ∆𝑞 Average Total Cost (ATC) Firm’s total cost divided by its level of output. Average Fixed Cost (AFC) Fixed cost divided by the level of output. Average Variable Cost (AVC) Variable cost divided by the level of output. The Determinants of Short-Run Cost The change in variable cost is the per-unit cost of the extra labor w times the amount of extra labor needed to produce the extra output ΔL. Because ΔVC = wΔL, it follows that ∆𝑉𝐶 𝑤∆𝐿 ○ 𝑀𝐶 = ∆𝑞 = ∆𝑞 The extra labor needed to obtain an extra unit of output is ΔL/Δq = 1/MPL. As a result, 𝑤 ○ 𝑀𝐶 = 𝑀𝑃 𝐿 Diminishing Marginal Returns and Marginal Cost  Diminishing marginal returns means that the marginal product of labor declines as the quantity of labor employed increases. As a result, when there are diminishing marginal returns, marginal cost will increase as output increases. User Cost of Capital Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest. The user cost of capital is given by the sum of the economic depreciation and the interest (i.e., the financial return) that could have been earned had the money been invested elsewhere. Formally, ○ User Cost of Capital = Economic Depreciation + (Interest Rate) (Value of Capital) We can also express the user cost of capital as a rate per dollar of capital: ○ r = Depreciation rate + Interest rate The Cost-Minimizing Input Choice We now turn to a fundamental problem that all firms face: how to select inputs to produce a given output at minimum cost. For simplicity, we will work with two variable inputs: labor (measured in hours of work per year) and capital (measured in hours of use of machinery per year). The Price of Capital The price of capital is its user cost, given by r = Depreciation rate + Interest rate. The Rental Rate of Capital Rental Rate ○ Cost per year of renting one unit of capital. If the capital market is competitive, the rental rate should be equal to the user cost, r. Why? Firms that own capital expect to earn a competitive return when they rent it. This competitive return is the user cost of capital. Capital that is purchased can be treated as though it were rented at a rental rate equal to the user cost of capital. Isocost Line Graph showing all possible combinations of labor and capital that can be purchased for a given total cost. To see what an isocost line looks like, recall that the total cost C of producing any particular output is given by the sum of the firm’s labor cost wL and its capital cost rK: ○ C = wL + rK (7.2) If we rewrite the total cost equation as an equation for a straight line, we get ○ K = C/r - (w/r)L It follows that the isocost line has a slope of ΔK/ΔL = −(w/r), which is the ratio of the wage rate to the rental cost of capital. Choosing Inputs  Recall that in our analysis of production technology, we showed that the marginal rate of technical substitution of labor for capital (MRTS) is the negative of the slope of the isoquant and is equal to the ratio of the marginal products of labor and capital: ○ MRTS = -∆𝐾/∆𝐿 = 𝑀𝑃 𝐿/𝑀𝑃 𝐾 (7.3) It follows that when a firm minimizes the cost of producing a particular output, the following condition holds: ○ 𝑀𝑃 𝐿/𝑀𝑃 𝐾 = w/r We can rewrite this condition slightly as follows: ○ 𝑀𝑃 𝐿/𝑤 = 𝑀𝑃 𝐾/𝑟 (7.3) Cost Minimization with Varying Output Levels Expansion Path ○ Curve passing through points of tangency between a firm’s isocost lines and its isoquants. The Expansion Path and Long-Run Costs ○ To move from the expansion path to the cost curve, we follow three steps: 1. Choose an output level represented by an isoquant. Then find the point of tangency of that isoquant with an isocost line. 2. From the chosen isocost line determine the minimum cost of producing the output level that has been selected. 3. Graph the output-cost combination. Long-Run Average Cost Long-run average cost curve (LAC) ○ Curve relating average cost of production to output when all inputs, including capital, are variable. Short-run average cost curve (SAC) ○ Curve relating average cost of production to output when level of capital is fixed. Long-run marginal cost curve (LMC) ○ Curve showing the change in long-run total cost as output is increased incrementally by 1 unit. Economies and Diseconomies of Scale As output increases, the firm’s average cost of producing that output is likely to decline, at least to a point. This can happen for the following reasons: 1. If the firm operates on a larger scale, workers can specialize in the activities at which they are most productive. 2. Scale can provide flexibility. By varying the combination of inputs utilized to produce the firm’s output, managers can organize the production process more effectively. 3. The firm may be able to acquire some production inputs at lower cost because it is buying them in large quantities and can therefore negotiate better prices. The  mix of inputs might change with the scale of the firm’s operation if managers take advantage of lower-cost inputs. At some point, however, it is likely that the average cost of production will begin to increase with output. There are three reasons for this shift: 1. At least in the short run, factory space and machinery may make it more difficult for workers to do their jobs effectively. 2. Managing a larger firm may become more complex and inefficient as the number of tasks increases. 3. The advantages of buying in bulk may have disappeared once certain quantities are reached. At some point, available supplies of key inputs may be limited, pushing their costs up. Economies of scale ○ Situation in which output can be doubled for less than a doubling of cost. Diseconomies of scale ○ Situation in which a doubling of output requires more than a doubling of cost. Increasing Returns to Scale ○ Output more than doubles when the quantities of all inputs are doubled. Economies of Scale ○ A doubling of output requires less than a doubling of cost. Economies of scale are often measured in terms of a cost-output elasticity, EC. EC is the percentage change in the cost of production resulting from a 1-percent increase in output: ○ 𝐸𝐶 = (∆𝐶/𝐶)/(∆𝑞/𝑞) (7.5) To see how EC relates to our traditional measures of cost, rewrite the equation as follows: ○ 𝐸𝐶 = (∆𝐶/∆𝑞)/(𝐶/𝑞) = 𝑀𝐶/𝐴𝐶 (7.6) Economies and Diseconomies of Scope Economies of Scope ○ Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product. When a firm can produce multiple products together more efficiently than separate firms producing those products individually. Producing multiple products together is cheaper than separate firms making each product. Diseconomies of Scope ○ Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product. When producing multiple products together is less efficient than having separate firms produce each product. Producing multiple products together can lead to inefficiencies compared to separate production.  As management and labor gain experience with production, the firm’s marginal and average costs of producing a given level of output fall for four reasons: 1. Workers often take longer to accomplish a given task the first few times they do it. As they become more adept, their speed increases. 2. Managers learn to schedule the production process more effectively, from the flow of materials to the organization of the manufacturing itself. 3. Engineers who are initially cautious in their product designs may gain enough experience to be able to allow for tolerances in design that save costs without increasing defects. Better and more specialized tools and plant organization may also lower cost. 4. Suppliers may learn how to process required materials more effectively and pass on some of this advantage in the form of lower costs. Learning Curve Graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output. ○ A learning curve is a graphical representation that shows how the amount of inputs (like time, labor, or resources) needed to produce each unit of output decreases as a firm gains experience and produces more units. The learning curve is based on the relationship −𝐵 ○ 𝐿 = 𝐴 + 𝐵𝑁 CHAPTER 4: Firm Production, Cost, and Revenue Profit ○ The money that business makes: Revenue minus Cost Cost ○ the expense that must be incurred in order to produce goods for sale Revenue ○ the money that comes into the firm from the sale of their goods Economic vs. Accounting Cost Economic Cost ○ All costs, both those that must be paid as well as those incurred in the form of forgone opportunities, of a business Accounting Cost ○ Only those costs that must be explicitly paid by the owner of a business Production Production Function ○ a graph which shows how many resources we need to produce various amounts of output Cost Function ○ a graph which shows how much various amounts of production cost Inputs to Production Fixed Inputs ○ resources that you cannot change Variable Inputs ○ resources that can be easily changed Concepts in Production Division of Labor ○ workers divide up the tasks in such a way that each can build up a momentum and not have to switch jobs Diminishing Marginal Returns ○ the notion that there exists a point where the addition of resources increases production but does so at a decreasing rate Costs Fixed Costs ○ costs of production that we cannot change Variable Costs ○ costs of production that we can change Cost Concepts Marginal Cost ○ the addition to cost associated with one additional unit of output Average Total Cost ○ Total Cost/Output, the cost per unit of production Average Variable Cost ○ Total Variable Cost/Output, the average variable cost per unit of production Average Fixed Cost ○ Total Fixed Cost/Output, the average fixed cost per unit of production Revenue Marginal Revenue ○ additional revenue the firm receives from the sale of each unit Maximizing Profit We assume that firms wish to maximize profits Market Forms Perfect Competition ○ a situation in a market where there are many firms producing the same good Monopoly ○ a situation in a market where there is only one firm producing the good Rules of Production A firm should a. produce an amount such that Marginal Revenue equals Marginal Cost (MR=MC), unless b. the price is less than the average variable cost (P ATC TR > TC Economic Profit ATR > ATC (The firm earns an economic profit since it covers all costs (fixed and variable) and earns extra P = ATC TR = TC No profit or loss ATR = ATC Normal Profit (Break-Even Point) (The firm breaks even, covering all costs but not earning an economic profit)  P < ATC TR < TC Loss but it can continue in production P > AVC TR > TVC (The firm incurs a loss because it cannot cover total costs, but it continues production since it can cover variable costs and contribute to fixed costs) P = AVC TR = TVC Loss (Shut-Down Point) (The firm is indifferent between shutting down and continuing production as it can only cover variable costs, not fixed costs) P < AVC TR < TVC Loss Close the firm and stop production (The firm shuts down because it cannot even cover its variable costs) Equilibrium Point point of profit maximization. MR = MC Pricing and Output Decisions: Perfect Competition and Monopoly Competition and Market Types in Economic Analysis Market Perfect Monopolistic Oligopoly Monopoly Characteristics Competition competition Number and large number of large number of small number of one firm, firm is size of firms relatively small small firms large mutually the industry buyers and acting interdependent sellers independently firms Type of product standardized differentiated differentiated or unique or no standardized close substitutes Market entry very easy relatively easy difficult difficult or legally and exit impossible Non-price not possible very important important not necessary competition  Key Indicators of Competition Market Power None Low to High Low to High High Examples agricultural boutiques oil refining pharmaceuticals products with patents restaurants processed foods financial regulated utilities instruments repair shops airlines (although this is changing) commodities internet access and cell phone last chance gas service station on the edge of the desert Monopoly Monopoly A firm that is the sole seller of a product without close substitutes Has market power ○ The ability to influence the market price of the product it sells ○ A competitive firm has no market power Arise due to barriers to entry ○ Other firms cannot enter the market to compete with it The Barriers to Entry Monopoly resources ○ A single firm owns a key resource. E.g., DeBeers owns most of the world’s diamond mines Government regulation ○ The government gives a single firm the exclusive right to produce the good. E.g., patents, copyright laws The production process ○ Natural monopoly: a single firm can produce the entire market Q at lower cost than could several firms Example: 1000 homes need electricity. ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. Monopoly vs. Competition: Demand Curves In a competitive market, the market demand curve slopes downward. But the demand curve for any individual firm’s product is horizontal at the market price. The firm can increase Q without lowering P, so MR = P for the competitive firm.  A monopolist is the only seller, so it faces the market demand curve. To sell a larger Q, the firm must reduce P. Thus, MR ≠ P. Monopoly’s Revenue P = AR, same as for a competitive firm. MR < P, whereas MR = P for a competitive firm. Increasing Q has two effects on revenue: ○ Output effect: higher output raises revenue ○ Price effect: lower price reduces revenue Marginal revenue, MR < P ○ To sell a larger Q, the monopolist must reduce the price on all the units it sells ○ Is negative if price effect > output effect MR is negative if the price reduction on all units (price effect) causes a greater loss in revenue than the revenue gained from selling one more unit (output effect). This is a typical scenario in monopolistic markets when the firm has to lower its price significantly to increase output. e.g., when Common Grounds increases Q from 5 to 6 Profit Maximization Like a competitive firm, a monopolist maximizes profit by producing the quantity where MR = MC ○ Sets the highest price consumers are willing to pay for that quantity ○ It finds this price from the D curve A Monopoly Does Not Have an S Curve A competitive firm takes P as given ○ Has a supply curve that shows how its Q depends on P A monopoly firm is a “price-maker” ○ Q does not depend on P ○ Q and P are jointly determined by MC, MR, and the demand curve ○ Hence, no supply curve for monopoly. The Welfare Cost of Monopoly Recall: ○ Competitive market equilibrium: P = MC and total surplus is maximized Monopoly equilibrium, P > MR = MC ○ The value to buyers of an additional unit (P) exceeds the cost of the resources needed to produce that unit (MC) ○ The monopoly Q is too low – could increase total surplus with a larger Q. ○ Monopoly results in a deadweight loss In simple terms, a monopoly leads to less production and higher prices because the monopolist controls the market and can set the price higher than it costs to make the product.  ○ Less production: The monopolist reduces the number of goods or services they produce to keep the price high and maximize their profit, even though there are consumers who would be willing to buy more at a lower price. ○ Higher prices: Unlike in a competitive market, where many firms compete and prices are driven down, the monopoly has no competition, so it can charge higher prices. This causes a welfare loss because fewer people can afford the product, and overall, the total value of what is produced (the total surplus) is lower than it could be if the market were competitive. So, society loses out on potential benefits. Price Discrimination: Sell the same good at different prices to different buyers A firm can increase profit by charging a higher price to buyers with higher willingness to pay Requires the ability to separate customers according to their willingness to pay Can raise economic welfare Firms divide customers into groups based on some observable trait that is likely related to willingness to pay (WTP), such as age Perfect Price Discrimination Charge each customer a different price Exactly his or her willingness to pay Monopoly firm gets the entire surplus (Profit) No deadweight loss Not possible in the real world ○ No firm knows every buyer’s WTP ○ Buyers do not reveal it to sellers Public Policy Toward Monopolies Increasing competition with antitrust laws: ○ The government uses laws to stop monopolies from becoming too powerful and to encourage competition. ○ Examples: Sherman Antitrust Act (1890): Bans monopolies and practices that restrict trade. Clayton Antitrust Act (1914): Prevents practices like price-fixing and unfair mergers that reduce competition. ○ These laws aim to prevent companies from dominating the market and to make sure businesses compete fairly. Regulation: ○ When a monopoly exists, the government can regulate its behavior, especially in cases where it’s a natural monopoly (like utilities). ○ This can include controlling prices to prevent the monopoly from charging too much.  ○ Example: If a company’s cost of producing more goods is lower than the price it charges, the government may intervene to set fair prices, sometimes subsidizing the company to avoid losses. Public ownership: ○ The government could own the monopolistic firm, which might help lower costs and ensure services are provided fairly to consumers. ○ Private owners want to make a profit, so they work to minimize costs. Public ownership might be less efficient because there’s no profit motive to cut costs. ○ If the government runs the company poorly, taxpayers and consumers might bear the costs. Do nothing ○ Some economists argue that it is often best for the government not to try to remedy the inefficiencies of monopoly pricing ○ Determining the proper role of the government in the economy requires judgments about politics as well as economics The Prevalence of Monopoly Pure monopoly – rare in the real world Many firms have market power, due to: ○ Selling a unique variety of a product ○ Having a large market share and few significant competitors In many such cases, most of the results from this chapter apply, including: ○ Markup of price over marginal cost ○ Deadweight loss Summary A monopoly is a firm that is the sole seller in its market. ○ A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a lower cost than many firms could. ○ Faces a downward-sloping demand curve for its product. Monopoly increases production by 1 unit ○ Causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. ○ Marginal revenue is always below the price A monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. ○ Sets the price at which that quantity is demanded. P > MR, so P > MC A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. ○ Causes deadweight losses A monopolist can often increase profits by charging different prices for the same good based on a buyer’s willingness to pay. ○ Price discrimination can raise economic welfare  ○ Perfect price discrimination, the deadweight loss of monopoly is completely eliminated Policymakers can respond to the inefficiency of monopoly behavior in four ways ○ Use antitrust laws to try to make the industry more competitive ○ Regulate the prices that the monopoly charges ○ Turn the monopolist into a government-run enterprise ○ Can do nothing at all The welfare cost of a monopoly is represented by deadweight loss. ○ A monopoly creates deadweight loss because it produces less than the socially optimal quantity and charges a higher price, leading to lost consumer and producer surplus. A natural monopoly occurs when it is more cost-effective for one firm to produce the entire market output than for multiple firms to do so. ○ A natural monopoly happens when a single firm can supply the entire market at a lower cost than multiple firms could due to economies of scale. Market Power: Monopoly and Monopsony Monopoly Market with only one seller. Monopsony Market with only one buyer. Market Power Ability of a seller or buyer to affect the price of a good. A Rule of Thumb for Pricing We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice. Measuring Monopoly Power Remember the important distinction between a perfectly competitive firm and a firm with monopoly power: For the competitive firm, price equals marginal cost; for the firm with monopoly power, price exceeds marginal cost. Lerner Index of Monopoly Power Measure of monopoly power calculated as excess of price over marginal cost as a fraction of price. Three factors determine a firm’s elasticity of demand. The elasticity of market demand. ○ Because the firm’s own demand will be at least as elastic as market demand, the elasticity of market demand limits the potential for monopoly power.  The number of firms in the market. ○ If there are many firms, it is unlikely that any one firm will be able to affect price significantly. The interaction among firms. ○ Even if only two or three firms are in the market, each firm will be unable to profitably raise price very much if the rivalry among them is aggressive, with each firm trying to capture as much of the market as it can. Barrier to Entry Condition that impedes entry by new competitors. Rent Seeking Spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly. Natural Monopoly Firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms. Rate-of-return Regulation Maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn. Oligopsony Market with only a few buyers. Monopsony Power Buyer’s ability to affect the price of a good. Marginal Value Additional benefit derived from purchasing one more unit of a good. Marginal Expenditure Additional cost of buying one more unit of a good. Average Expenditure Price paid per unit of a good. Bilateral Monopoly Market with only one seller and one buyer. Antitrust Laws Rules and regulations prohibiting actions that restrain, or are likely to restrain, competition. Parallel Conduct Form of implicit collusion in which one firm consistently follows actions of another. Predatory Pricing Practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits.