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ECON 2020 STUDY GUIDE TEST 4

ECON 2020 STUDY GUIDE TEST 4 - ECON 2020 STUDY GUIDE TEST#4...

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ECON 2020 STUDY GUIDE TEST #4 TERMS: Monopoly: a market structure with a single seller in an industry. It is the exact opposite of perfect competition Price searcher : a producer that finds the product—maximizing Price/Quantity combination Economies of scale : because it is cheaper for an older firm to produce than it is for a new firm, an older firm can lower cost while the new firm cannot afford to. Eventually, this will drive the new firm out of the market Price discrimination : is the practice of charging different groups of buyers different prices based on differences in Elasticity. This cannot happen in a competitive market because there are other options for the buyer Market power : P = 10 – Q MR = 10 – 2Q MR falls twice as fast. P = a – bQ MR = a – 2bQ Advertising : because there are so many sellers, there is a small demand for a specific product. Also, many close substitutes mean that the product is highly elastic. Both of these make increasing price difficult. So, firms will advertise to set their product apart Informative advertising : ads that reduce search and information costs by telling consumers something about the product Persuasive advertising : ads that provide little information but attempt to convince consumers that there are benefits from selecting one product rather than another Excess capacity : when a firm chooses to produce less than the minimum ATC. Q* > Q where ATC is minimized Mutual interdependence : firms mean that the actions of one firm will affect the other firms in the market Collusion : is cooperation between firms to raise each other’s profits. They do this to split a monopoly’s profit. If firms try to compete, Quantity rises and Price falls Cartel : an agreement among firms to restrict output to achieve monopoly power in a written contract.
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