Study guide Ex3

Study Guide - Exam 3

The following study guide is based primarily on the instructor's notes and lecture topics. It does not yet fully incorporate material from the text book, Chapters 24, 25, and 26. So, students should be careful to cover these chapters on there own.

Models of Market Structures

Perfect Competition

Seven Necessary Assumptions of the Model of Perfect Competition

1. Maximizing Behavior

Utility & Profit Maximization
Preference Ordering

2. Price-taking Behavior
3. Unlimited number of small firms
4. No Barriers to Entry nor Exit
5. Perfect Information
6. Identical (or homogenous) products
7. Instantaneous and costless adjustments

Six Outcomes or Results of the Model of Perfect Competition

1. Efficiency (Economic, Prodcutive, Allocative)
2. Social Optimality
3. Consumer Sovereignty
4. Uniqueness

Barriers to Entry/Exit

1. Patents, copyrights
2. Natural
3. Technical
4. Legal
5. Political
6. Sociological

The Increasing Concentration of Capital

Market competiton rewards the most efficient producers. By being more efficient a producer lowers its production costs. This allows it to either sell a product for a lower price and gain market share (i.e. more sales) or sell the product at the market price and gain more profit. Either way the most efficient firm ends up growing more rapidly than its less efficient competitors. However. the most efficient firms are not stupid, the very fact that they have innovated more rapidly means that they know they have to re-invest in new research and development to continue their productivity advantage. But because they have already grown more rapidly they have more money to re-invest and therefore, are more likely to to grow more rapidly in the next period. Overtime the most efficient producer out grows all other producers and dominates the market. A competitive market has naturally evolved into an uncompetitive monopoly. If you add in the ability of large firms to lobby and influence legislation their economic power now transfers over to political power, and small competitiors are at even a greater disadvantage.

Monopoly

Price Discrimination
Efficiency gians/losses

Monopolistic Competition

Oligopoly

The Four Firm Concentration Ratio

Various Strategies of Collusion and Anti-Competitive Activities

Cooperation
    1. Collusion/Prce fixing
    2. Price leadership
    3. Prescribed market share

Retaliaiton
    4. Flooding the market
    5. Predatory pricing
    6. Price Wars

Time Permitting

Prisoners' Dilemma
Nash Equilibrium

Final Exam - Possible Short Answer Essay Questions

These questions refer predominantly to material from the lectures. Many of the questions can be addressed from the material in the text.

1.    Explain how a competitive market tends to generate an “increasing concentration of capital”.

2.    Know all of the assumptions of the Perfect Competition model, especially the 5 economic assumptions. Be able to explain the economic reason why each assumption is made.

3.    Explain the assumption of price-taking behavior (or alternatively the assumption of a large number of small firms) in the model of perfect competition. Why must we make this assumption?

4.    Explain the assumption of perfect information in the model of perfect competition. Why must we make this assumption?

5.    Explain the assumption of no barriers to entry. Why must wemake this assumption? Explain 3 barriers to entry that actually exist in real markets.

6.    What are 3 beneficial results or outcomes of the theory of perfect competition?

7.    How are the results of the perfect competition model affected if any of the assumptions on perfect competition does not hold?

8.    Explain 3 different anti-competitive strategies that firms use in the model of oligopoly. Give one example from lecture, one example from the text,

9.    Explain the competitive strategy(s) that firms use in the model of monopolistic competition. Be able to give examples.

10.    Advertising can improve the functioning of the market, or it can distort the market. First, explain how it can improve the functioning of the market. Second explain the role of advertising in generating imperfect markets (i.e. monopolistic competition)?

	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number & Size of Firms	unlimited number; very small; none has market power	many; various sizes; each seeks mkt. power over a market segment	very few; extremely large; each able to influence industry Q & P	one; various sizes; total market power; sole dominance over industry
Pricing Behavior	price-takers. firm takes Prices, costs decides Q to maximize profit. P =MR = MC = ATC	each firm tries to gain monopoly pricing power over a market segment via location, advertising, brand name recognition, consumer loyalty. P maybe greater than or equal to ATC.	oligopolistic firms have unlimited strategies; can collude, go-it-alone, or damage each other. P maybe greater than, equal to, or less than ATC.	price-maker; monopolist reduces Q to raise P > ATC.
Economic Profit	zero economic profit.	zero or positive economic profit	positive, zero, or negative economic profit.	positive economic profit.
Barriers	None	Low	High	Highest
Product	Identical	Differentiated	Substitutes	Unique

ECON 201 - Principles of Economics:

Intro. to MICROECONOMICS