AAE 215 FINAL
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| Pure Monopoly | One seller, no close substitutes, price maker, entry barriers strong, little nonprice competition
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| Economies of Scale | Having one large firm is more efficient
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| Monopoly Demand | Firm is the industry
D curve is downsloping
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| Monopoly MR | Decreasing
Always twice as steep as D curve
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| Pure Comp MR | Constant
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| Price in Monopoly | P is on D curve above where MR=MC
Set in elastic region
MR < P
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| Profit Maximizing Point Monopoly | MR=MC
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| Highest Price in Monopoly | Not what is charged. Can't sell enough at highest possible price
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| Monopoly Total Profit | Lower per unit profit, sell more units to get higher total profit
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| Monopoly Vulnerability | Possibility of losses, vulnerable to changes in D and cost
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| Economic Efficiency of Monopoly | Less efficient than Pure Comp
DWL
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| X Efficiency | Production costs are higher than necessary costs
Internally driven inefficiency
No competitors so costs are driven
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| Network Effects | More users = more benefit for other users
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| Rent Seeking Behavior | Monopolies seek government subsidies, etc.
Inefficient resources used on lobbying
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| Antitrust Laws | Break up firm that is harmful to competition
Done by government
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| Government Regulation of Monopoly | Government determines price and quantity, regulation
Can also ignore and let times and markets get rid of monopoly
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| Price Discrimination | Charging different buyers different prices that aren't based on cost differences
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| Price Discrimination Conditions | Must have monopoly power, market segregation (identify different buyers and separate consumers based on WTP), no resale (low buyer can't buy and sell at higher price)
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| Price Discrimination Examples | Business travel
D inelastic, can't wait so P increases
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| Socially Optimal Price in Monopoly | Set price=MC
Most efficient, but might cause losses for company. Would need subsidies
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| Fair Return Price Monopoly | P = ATC
Not allocative efficiency, but break even (fair return) for business
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| Monopolistic Competition | Relatively large number of sellers
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| Product Differentiation in Mono Comp | Power to set the price w/unique product
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| Nonprice Competition in Mono Comp | Used considerably, emphasis on advertising and brand
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| Demand in Mono Comp | Demand is highly elastic, but not perfectly elastic
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| Short Run Profit/Loss in Mono Comp | If ATC higher than MR, profit
If ATC higher than D and MR then losses
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| Long Run in Mono Comp | Zero economic profit (normal profit)
Entry and exit
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| Mono Comp and Efficiency | Inefficient, produces where costs are higher than ATC (productive inefficiency)
Produces at P > MC, so allocative inefficiency
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| Product Variety in Mono Comp | Firms constantly managing price, product and advertising
Better product differentiation and advertising means more money
Consumer benefits by greater array of choices and better products
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| Profit Maximizing Point Mono Comp | Find MR=MC, then go up and find where that intersects D
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| Oligopoly | A few large producers
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| Homogeneous Oligopoly | Essentially identical products
Zinc, Steel, Copper, etc.
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| Differentiated Oligopoly | Cars, cereals, tires, etc.
Limited control over price since they have to worry about rivals
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| Strategic Behavior in Oligopoly | Mutual interdependence (actions by one firm impact the other)
Strategic Pricing
Collusion (cooperate rather than compete w/rivals)
Game Theory
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| Prisoner's Dilemma | Best outcome if both are silent, but their must act independently
Independent actions stimulate response
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| Kinked Demand Oligopoly | Non-Collusive
Uncertain about rivals reaction (rivals match price changes when it's a dec, ignore when they inc)
Kinked since firms follow price dec
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| Criticisms of Kinked Demand | Explains inflexibility but not price, assumes P is established
Prices aren't really that rigid
Price war (competition for lower prices)
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| Cartels and Other Collusion | If identical and similar D and costs, firms collude
Increase efficiency and set price
Optimizes firm's profits
Most often homogeneous products
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| Obstacles to Collusion | D and cost differences between firms
Number of firms
Cheating
Recession
New entrants
Legal obstacles
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| Price Leadership Model | Dominant firm initiates price change, and other firms follow
Match P to keep market share the same
Leads to stability
Pricing can be used to block entry of new firms
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| Price Leadership Model Problems | Possible price war (if dominant firm raises P too much, others can undermine)
Dominant firm may get caught in collusion and in legal trouble
Model won't work in recession
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| Oligopoly and Advertising | Common to compete through advertising and product development
Less easily copied by rivals compared to P change
Creates product loyalty
Financially, firms can afford to advertise
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| Pros of Advertising- Oligopoly | Low cost way of providing product info to consumers
Enhances competition
Speeds up tech progress
Helps firms obtain economies of scale (lowers LR ATC)
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| Cons of Advertising - Oligopoly | Can be manipulative and have misleading claims
Can increase TC (higher price for consumers)
Consumers can forgo better product in favor of better advertised one
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| Oligopoly and Efficiency | Inefficient, productively (P> min ATC) and allocatively (P> MC)
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| Oligopoly Qualifications | Inc in foreign competition (forces more efficiency to remain competitive)
Limit prices
Tech advances
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| Commodity Consumption | Supply has risen higher than D and prices continue to fall due to oversupply
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| Resource Sustainability | Resource consumption will peak and fall w/birth rates
Resource consumption per capita has dec/leveled off
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| Resource Consumption Per Person | Leveled off in rich countries
D will inc in poor countries
Challenge is to move resource supplies from place of origin to place of D
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| Energy Economics | Energy efficiency is increasing
Highly variable D
Uninterrupted service expected
Variations in FC
Optimal strategy is to combine different types of generation tech
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| Environmental Impacts of Energy | Externalities for fossil fuels
Alternatives can help, but they have their own issues
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| Negative Externalities in Energy | Energy generation creates pollution that pollutes the atmosphere
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| Negative Externalities Policy Options | Social costs of electricity production exceed private production costs
Too much pollution
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| How to Lower Pollution? | Quantity based approach (government sets limit on amount of emissions plant can produce)
Price based (tax levied for each ton produced. Inc costs, incentives improvement). Like Carbon Tax
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| Environmental Kuznets Curve | Idea that as countries get wealthier, the enviro impact inc, but then dec
Criticized for understating global impact
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| Natural Resource Economics | Policies for extracting resources to max net benefits (Net Rev-TC)
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| Resource Management | Present vs. Future Consumption
Present value
Extraction strategy to maximize profits
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| User Cost | Opportunity cost of using resources today
Putting opportunity cost in today's dollars
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| Higher expected D... | Encourages less extraction today
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| Natural Resource Per Unit Profit | P-TC
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| ITQs | Individual Transfer Quotas
Limits amount of individual catch
Market pressures mean these are sold to those w/lowest cost
Eliminates ineffiicency
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| Farm Demand | Inelastic D
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| Shifts in D Effect on Ag Prices and Income | Shift in D causes large change in P and farm income
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| Fluctuations in P and Ag Income | Due to inelastic D combined w/changes in output, shifts/changes in D, and changes in D
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| Changes in D of Ag Products | D sensitive to foreign markets (weather/crop production abroad)
Foreign economic policies (protectionist policies home and abroad)
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| US Farm Exports | SR inconsistencies
LR growth
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| Long Run: Declining Industry | Ag output and productivity are growing
Employment and some inputs going down (tied to pop growth)
Smaller share GDP (ag is growing, other sectors are growing faster)
LR decline of ag prices and farm income
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| Decline of Farm P and Income | D inc slowly, and is inelastic w/respect to income
Slow population growth
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| Major Consequences of Dec in Farm Income and P | Inc minimum efficient scale
Consolidation
Agribusiness
Massive exit of workers
Farm household income (used to be lower, now higher than normal)
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| US Employment and Farm Number | Less farms, less employees
Decrease in MES
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| Minimum Efficient Scale | Output at which long run ATC is minimized
Lowest point on LR ATC curve
Low MES = market w/lots of small producers
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| Economics of Farm Policy | Subsidized since 1930s:
support for ag prices, income, and output, Soil and water conservation, ag research, farm credit, crop insurance, etc.
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| Economics of Price Supports | Binding price floor above equilibrium price. Purchase any unsold supply
Creates surplus
Gain to farmers (higher incomes), loss to consumers (higher price)
Overallocation of resources
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| Milk Price Supports | Price floor -> surplus
Government buys and stores or sells at a loss
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| Sugar Price Supports | Higher P for consumers inefficient resource use
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| Rationale for Farm Subsidies | Necessity of life, Family farm institutions, extraordinary hazards (risk management), Comp market for outputs while inputs have considerable market power (inputs can exploit farmers)
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| Alternative to Price Supports | Reduce/Restrict Supply (acreage allotments/conservation). Conserve land/more sustainable land use
Increase Demand (new uses for ag outputs, stimulate consumption (food stamps, export promotion, etc.))
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| Criticisms of Price Supports | Generate surplus, tax burden, overall supply
Address symptoms, not policy and causes
Misguided subsidies (given per bushel, so biggest farms get the most, and small farms get least)
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