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ECON 2113- Midterm Exam Guide - Comprehensive Notes for the exam ( 16 pages long!)Premium

16 pages61 viewsSpring 2017

Department
Economics
Course Code
ECON 2113
Professor
Dr.Vera Tabakova
Study Guide
Midterm

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ECU
ECON 2113
MIDTERM EXAM
STUDY GUIDE
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1
(Chapters 10, 11, and 12)
Barriers to entry: restrictions that make it difficult for new firms to enter a market;
allows monopolists to enjoy long run economic profit
Natural Barriers to Entry
Control of resources
Inability of potential competitors to raise enough capital
Economies of scale - “Bigger is better” (more cost-efficient)
Government Created Barriers
Necessary licenses and qualifications
Patents and copyright law
Patent: temporarily grants monopoly rights to a product; incentive to innovate
Copyrights (and higher resulting prices) sometimes create unintended
consequences (file sharing, movie pirating)
Natural monopoly: a monopoly exists because a single large firm has lower costs than
any potential competitor
*Breaking up the firm into multiple competitors may increase costs as well
Price maker: sets the price choosing output level
Market failure: operate inefficiently (deadweight loss)
Restrictiting output and charging higher prices compared to competitive markets
Less choices for consumers
Rent seeking: competition among rivals to secure monopoly profits (inefficient)
Produces one winner without the other usual benefits of competition
Price discrimination: a firm sells the same good to different consumers at different
prices for reasons NOT associated with cost differences
Perfect price discrimination: firm charges a unique price to each consumer equal to
their maxium willingness to pay
Reservation price: max willingness to pay
There will be zero consumer surplus
Product differentiation: contrasting a products unique qualities w/competing products
Markup: the difference between Price and Marginal Cost
Possible when a firm has market power and sells a differentiated product
Results in consumers paying more
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2
Excess capacity: firms are relatively small, so they are not at the output level where ATC
is minimized
Q. Why not produce more?
A. To sell more, the firm would have to lower the price of output. It is more
profitable to produce at excess capacity.
Advertising: a method of nonprice competition
Provide information for consumers
Further differentiate the product
Increase demand for the product
Homogenous products means that advertising won’t help an individual firm
A single firm that advertises would be at a cost disadvantage
However, the industry can still benefit from advertising (beef, milk, orange juice)
Negative Effects of Advertising:
Advertising raises costs
When all firms advertise, the demand-increasing effects may cancel
each other out
No overall demand change, but higher costs still exist
Business stealing externality
Inspiring brand loyalty - creates more inelastic demand, which raises prices
Persuasive rather than informative; incentive to lie about product
Be prepared to answer questions about:
Perfectly competitive firms
Price takers, cannot affect the price
Each firm faces a horizontal demand
Monopoly firm
Price maker, sets the price by choosing output level
Faces the downward-sloping demand curve for the entire industry
Monopolistic competition
A market structure characterized by
Free entry
Many different firms
Product differentiation
Similarity between monopoly and competitive firms
Profit is maximized at output level (Q) where MR = MC
Difference between monopoly and competitive firms
In competition, P = MR
In monopoly, P > MR
To increase output, monopoly must lower the price. Competitive firms can
sell as much as they want at the market price.
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