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ECON 1116 Chapter Notes - Chapter 14: Monopolistic Competition, Imperfect Competition, Marginal Revenue

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coralseal265
11 Mar 2014
School
Northeastern University
Department
Economics
Course
ECON 1116
Professor
Osborne Jackson

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Document Summary

Oligopoly: an industry with only a small number of producers. Imperfect competition: when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices. (firms compete but also possess market power). Two important forms of imperfect competition: oligopoly and monopolistic competition. Most important source of oligopoly is the existence of increasing returns to scale, which give bigger producers a cost advantage over a smaller one: when effects are strong, they lead to monopoly. Duopoly: an oligopoly consisting only of two firms. So how much will they produce: collusion: two companies engage in collusion when they cooperate to raise their joint profits. Cartel: is an agreement among several producers to obey output restrictions in order to increase their joint profits. Individual firm in an oligopolistic industry faces a smaller price effect from an additional unit of output than does a monopolist. Interdependence: where each firm"s decision significantly affects the profit of the other firm (or firms).

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Related Questions

1. When a profit-maximizing firm produces, they will be producing at that output at which marginal cost = marginal revenue:

  • all of the time
  • some of the time
  • on rare occasions
  • none of the time

2. Economics Profit is:

  • the same as accounting profit
  • sales minus explicit costs and implicit costs
  • sales minus variable costs and fixed costs
  • opportunity cost only

3. A market structure with so many firms that no one firm has any influence over price, and firms produce an identical product is called:

  • monopoly
  • oligopoly
  • perfect competition
  • monopolistic competition

4. Which of the following is NOT a characteristic of a perfectly competitive market?

  • identical products
  • perfect mobility
  • perfect knowledge
  • price maker

5. The demand curve in a perfectly competitive market is perfectly elastic.

  • true
  • false

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B.Ā If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C.Ā Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D.Ā If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E.Ā For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F.Ā A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G.Ā If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I.Ā Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J.Ā At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.

See the question and two answers, give brief your own opinion for each answer( are you agree on disagree with the answer, why?)

Q:This week, we are discussing market types. In this forum, please pick one of the market types that are presented in your textbook and provide your own definition (use your own words) and example. What do you think are the benefits vs. deficiencies of your chosen market type?

Answer 1)

Perfect Competition

This kind of market type stipulates the overall advantage that a market has. In this market, there are many sellers and buyers.These players do not control the price of commodities or services but the prices are controlled by the demand and supply of goods and services. As a result of this, no one can determine the market price of commodities because customers will switch to the next best alternative. All the market players in this sense are price takers and the customers that subscribe to these goods have a lot of experience about the goods offered. It means therefore that they have adequate information about the goods available, which means, therefore, they are aware of the prices that are being charged. All the firms that exist in this kind of market type have a relatively small market share because of the existence of so many of them. The market is also characterized by free entry and exit of firms. New firms can enter the market if they so wish and create competition to the existing firms. Due to this nature of many firms, most of them only earn enough to keep them on the market and nothing more for these firms (Makowski & Ostroy, 2001).

Answer 2)

The Oligopoly; best recognized by few sellers, identical (or similar) products, and its difficult entryinto the market. A good way to determine if a market has an oligopoly is if the change in one seller, causes its "competition" to change likewise. Automotive, cell phone industries, and aviation are some examples of markets that have an oligopoly. In the automotive industry, if one vehicle producer (lets say Chevrolet) changes the body style of its line up, other "completion" is soon to follow. Notice how cars these days are getting nicer and nicer for the base model? Research and Development is greatly valued in an industry that has an oligopoly. This is because if a seller lowers prices, they understand that its competitors will soon follow with ease. But, if they develop a better improvement over its last model in technology, it is much harder to follow than just a reduction in price.

The advantage of an oiligolpoly is that the leaders can set prices instead of take them. Which leads to those that are in charge having the ability to increase profit margins above what they would be in a truly free market.

The disadvantage is that for those looking to try to get into the market will have much difficulty because of the common huge capitol expenditures required to actually compete with the big boys.