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CH 9

Market StructureThe characteristics of a market that influence how trading takes place

PriceTaker A firm that treats the price of its product as given and beyond control

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Shutdownprice The price at which a firm is indifferent between producing and shutting down

Firms supply curve A curve that shows the quantity of output a competitive frim will produce at

different prices

Marketsupplycurve A curve indicating the quantity of output that all sellers in a market will produceat different prices in the short run

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Normalprofit Another name for zero economic profit

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Constantcostindustry An industry in which the long-run supply is horizontal because each firms cost

curves are unaffected by changes in industry output

Long Run Supply Curve A curve indicating price and quantity combinations in an industry after all long

run adjustments have taken place

Increasing cost industry An industry in which the long-run supply curve slopes upwards because each

firms LRATC curve shifts upward as industry output increases.

Decreasing cost industry An industry in which the long-run supply curve slopes downward as industry

output increases

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MarketSignals Price changes that cause change in production to match change in consumer demand

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CH 10

MonopolyThe only seller in a market, or a market with just one seller

How do monopolies arise:

1. Economicofscale a single firm can produce at a lower cost than 2 or moreNaturalMonopoly A monopoly that arises when, due to economics of scale, a single firm can produce

for the entire market at a lower cost per unit than 2 or more firms

2. LegalBarriers give one firm the ability to become a monopoly it is done to give incentive forfinding new technologies and etc

Patent a temporary grant of monopoly rights over a new product or science discovery

Copyright A grant of exclusive rights to sell a literary, musical, or artistic work

3. GovernmentFranchise A government-granted right to be the sole seller of a product orservice

4. Network Externalities Additional benefits enjoyed by all users of a good or service becauseothers use it as well

Monopoly Behavior goal make profut

Single-price monopoly A monopoly firm that is limited to charging the same price for each unit of

output sold

A Monopoly has a downward demand curve (same as markets) so its marginal curve is always under it!

Profit Maximization is where MC=MR (MC comes from bottom) Monopoly produces at the level that is

not as the perfect competition market it produces less normally

Marketpower The ability of a seller to raise price without losing all demand for the product being sold

a M is a price setter has market power downward demand!

Pricesetter A firm (with market power) that selects its price, rather than accepting the market price

A monopoly earns profit if P>ATC and loss if P

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Rent-seeking activityAny costly action a firm undertakes to establish or maintain its monopoly status

(In economics rent is earnings beyond min needed)

PriceDiscrimination Charging different prices to different customers for reasons other than

differences in cost

Requirements for Price Discrimination:

1. Market power downward demand ability to have people paying a different amount2. Identifying Willingness to Pay need to know how much to charge each3. Prevention of Resale so ones that buy cheap can sell to others

P.D is always good for the firm! But some customers will loss from it while other might benefit

Also it takes away from consumer surplus and from dead loss?

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Perfect Price Discrimination Charging each customer the most he or she would be willing to pay foreach unit purchased

How to choose multiple prices: (USE SAME MC)!!

P.D. is everyday life Coupons/sales/rebates/also colleges do that for tuition

CH 11

ImperfectCompetition A market structure in which there is more than one firm but one or more of

the requirements of perfect competition is violated

Monopolistic Competition - has 3 fundamental characteristics:

1. Many buyers and sellers buyer has no influence on price, but seller has market power- acts asprice setter. but do not take other firms into account

2. Sellers offer a differentiated product Because it produces a differentiated product, amonopolistic competitor faces a downward-sloping demand curve: it can sell more by chargingless, or raise price without losing all customers (D includes quality and location)

3. Sellers can easily enter and exit the market each firm can leave, or new can enter. Also, anyfirm can copy the successful practices of other firms like special sales etc

In the short runM.C. can earn both negative and positive profit

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In long runM.C. will earn 0 economic profit new firms can enter if positive until demand shifts to the

left to the point in is tangent to the ATC. Or in if losing firms leave demand shifts to right same point

Important in M.C. there will be excess capacity the price in L.R. cannot be where pricetouches min ATC (called capacity point), for its demand it downward slopping

if it makes profit the demand will keep shifting to the left until in tangent to ATC on the downsloping section of it.

Also, id demand is already there the M.C. will loss by producing the amount that it equal to themin ATC. (it has to have a horizontal demand in order to have 0 eco profit and be on the min-

like in perfect competition)

Also society losses from excess capacity, but it also gains from product differentiation.Nonpricecompetition Any action a firm takes to SHIFT its demand curve rightward

Oligopoly A market structure with a small number of strategically interacting firms (many types 1 big

and other smaller/ all same size/)

The way we view a market depends on how we define it with a narrow enough definition easy to

find an oligopoly. Economists say to define the market just broadly enough so it includes reasonably

close substitutes.

How Oligopolies Arise:

Economics of scale natural oligopoly a market that tends naturally towards oligopolybecause the min efficient scale of the typical firm is a large fraction of the market

Reputation as a Barrier an established oligopoly is likely to have favorable reputation Strategic Barriers an O firm can maintain excess capacity to warn u that if u (new) come it they

will saturate the market and leave u with no revenue. Also, they make deals to have their

products on shelves.

Legal Barriers Patents and Copyrights for some firms but no all. Also they lobby a lot to get their ways, Zoning..

Oligopolies cannot use the MC=MR approach because the second one firm sets its price the other can

change its own and the demand of the first firm changes and it has to start all over again.

Gametheory An approach to modeling the strategic interaction of oligopolies in terms of moves and

countermoves

DominantStrategy A strategy that is best for a player no matter what strategy the other player

chooses

NashEquilibrium A situation in which every player of a game is taking the best action for themselves,

given the actions taken by all other players (u dont change ur behavior once there-no incentive)

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When 2 players have both dominant strategy the result always Nash E! Also we assume that each player takes the best action for himself !

Duopoly An oligopoly market with only two sellers

Repeatedplay A situation in which strategically interdependent sellers compete over many time

periods

Explicitcollusion Cooperation involving direct communication between competing firms about setting

prices

Cartel A group of firms that selects a common price that maximizes total industry profits

TacitCollusion Any form of oligopolistic cooperation that does not involve explicit agreement

Tit-for-tat A game-theoretic strategy of doing to another player this period what he has done to you in

the previous period

PriceLeadership A form of collusion in which one firm sets a price that other firms copy

The Limits of Collusion:

The market demand curve higher price less sold Oligopolies are often wakened or destroyed by new technologies Collusion is limited by powerful incentives to cheat on any agreement

Anti Trust legislation and enforcement:

1.

Preventing collusive agreement among firms, such as price-fixing agreements2. Breaking up large firms or limiting their activities when market dominance harms consumers3. Preventing mergers that would lead to harmful market domination