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eco test 3 study guide

eco test 3 study guide - Chap 12 Monopolistic competition a...

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Chap 12 Monopolistic competition – a market structure in which barriers to entry are low and firms compete by selling similar, but not identical, products If a firm has the ability to affect the price of what it sells, its MR revenue curve will be below its demand curve In monopolistic competition, Average revenue = price In monopolistic competition, a firm will produce where P > MC, profits will be maximized at this point o The amount of profit will be represented by Q(P-ATC) Entrance of new firms will shift demand curves for any one firm to the left, along with making demand more elastic o When the demand curve shifts to the point where it is tangent to the ATC curve, the firm is breaking even Unless a monopolistically competitive firm can find ways to differentiate its products, or produce its products at a lower cost, it will lose all economic profits in the long run Firms In monopolistic competition have excess capacity, if they increase output, they can produce at a lower average total cost o These markets however are inefficient, achieving neither productive or allocative efficiency How can a firm differentiate? o Marketing – all the activities necessary for a company to sell products to a customer Brand management – the actions of a firm intended to maintain the differentiation of a product over time Advertising Enforcement of trademarks What makes a firm successful? o Value created to customers Differentiation Producing at a lower ATC than competitors o Marketing o Chance events
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Chap 13 Oligopoly – a market structure in which a small number of interdependent firms compete Oligopolies have 3 main barriers to entry o Economies of scale o Ownership of a key input o Government imposed barriers analysts use game theory to study oligopolies o Game theory is the study of how people make decisions in situations in which attaining their goals depends on their interactions with others o a payoff matrix can show the payoffs of every combination of business strategies by different firms o Sometimes companies will collude , or agree to charge the same price or otherwise not compete (ILLEGAL!) o ultimately, a manager will price products in order to maximize profit relative to the prices of other companies, this is called using a dominant strategy this is the main concept behind Nash Equilibrium (A Beautiful Mind) Firms can maximize payoffs by cooperating, thus attaining cooperative equilibrium o Contrarily, noncooperative equilibrium is when firms pursue their own interests A cartel is a group of firms that collude to restrict output in order to increase prices and by extension, profits A sequential game is when decisions follow the decisions of other competitors o Sequential games are used to analyze deterring entry and bargaining between firms Five forces model shows competition in an industry o Competition form existing firms o Threat of new entrants o Threat of substitutes o Buyer power o Supplier power
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