Econ Chapter 7 Test Questions – Flashcards
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perfect competition
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aka pure competition; a market structure in which a large number of firms all produce the same product
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four conditions for perfect competition
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1. many buyers and sellers participate in the market. 2. sellers offer identical products. 3. buyers and sellers are well informed about products. 4. sellers are able to enter and exit the market freely.
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commodity
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a product that is the same no matter who produces it; e.g. petroleum, notebook paper, milk
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barrier to entry
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any factor that makes it difficult for a new firm to enter a market
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imperfect competition
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a market structure that does not meet the conditions of perfect competition
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start-up costs
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the expenses a firm must pay before it can begin to produce and sell goods
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monopoly
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a market dominated by a single seller
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economies of scale
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factors that cause a producer's average cost per unit to fall as output rises
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natural monopoly
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a market that runs most efficiently when one large firm supplies all of the output
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government monopoly
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a monopoly created by the government
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patent
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a license that gives the inventor of a new product the exclusive right to sell it for a certain period of time
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franchise
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the right to sell a good or service within an exclusive market
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license
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a government issued right to operate a business
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price discrimination
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division of customers into groups based on how much they will pay for a good
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market power
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the ability of a company to change prices and output like a monopolist
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monopolistic competition
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a market structure in which many companies sell products that are similar but not identical
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four conditions of monopolistic competition
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1. many firms. 2. few artificial barriers to entry. 3. slight control over prices. 4. differentiated products.
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differentiation
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making a product different from other similar products
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nonprice competition
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a way to attract customers through style, service, or location, but not a lower price
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oligopoly
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a market structure in which a few large firms dominate a market
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price war
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a series of competitive price cuts that lowers the market price below the cost of production
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collusion
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an agreement among firms to divide the market, set prices, or limit production
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price fixing
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an agreement among firms to charge one price for the same good
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cartel
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a formal organization of producers that agree to coordinate prices and production
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predatory pricing
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selling a product below cost to drive competitors out of the market
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antitrust laws
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laws that encourage competition in the marketplace
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trust
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like a cartel, an illegal grouping of companies that discourages competition
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merger
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combination of two or more companies into a single firm
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deregulation
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the removal of some government controls over a market
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cause: buyers and sellers are not likely to work together to bargain for better prices
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effect: the market determines price without influence from suppliers or consumers
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cause: the buyer will not pay extra for one particular company's goods
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effect: identical products are the key to perfect competition
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cause: entrepreneurs are less likely to enter a market with high start-up costs
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effect: markets that involve high start-up costs are less likely to be perfectly competitive markets
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cause: sometimes firms cannot make enough money to stay in business
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effect: firms enter and leave a perfectly competitive market
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cause: many sellers compete to offer their commodities to buyers
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effect: prices are forced down to the point where they just cover the seller's costs of doing business
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cause: no suppliers can influence prices in a perfectly competitive market
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effect: producers adjust their output decisions based on their most efficient use of available land, labor, and capital
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why do natural monopolies exist?
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to allow for the most efficiency in a market by having only one large firm provide all of the output
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two examples of natural monopolies
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public water, and utilities and electricity, PG&E
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advantage of natural monopolies
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the government allocates resources more efficiently
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government role in natural monopolies
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control prices and services provided by a company
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type of government monopoly set up by patents
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technological monopoly
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why government grants patented monopolies
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to encourage firms to research and develop new products that benefit society as a whole
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example of an industrial monopoly
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professional sports leagues - MLB
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examples of government monopolies by license
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radio/television broadcast frequencies, and city public parking lots
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effect of a monopolist's price increase
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it will sell less
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relationship between price and marginal revenue when a monopolist cuts the price to sell more
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marginal revenue is less than price
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how a monopolist maximizes profits
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by choosing a level of output at which marginal revenue is equal to marginal cost
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forms of non-price competition
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1. physical characteristics; 2. location; 3. service level; 4. advertising, image, or status
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price-output relationship
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as one rises, the other falls; they are negatively related
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curbs on high profits
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fierce competition, and new firms
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consumer advantages of monopolistic competition
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a wide variety of choices for a particular product
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oligopoly conditions encouraging formation
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1. barriers to entry; 2. economic realities, such as high start-up costs; 3. economies of scale
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practices that concern government
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1. price leadership; 2. collusion; 3. cartels
