CLEP Microeconomic Notes 1

Since monopolistic competition is inefficient bii1

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Since monopolistic competition is inefficient (b.ii.1) Price (P) is greater than Marginal Cost (MC) (b.ii.2) Goods and services are priced at a higher level than the cost to produce 142) Game Theory – a mathematical analysis of the strategic moves and counter-moves that occur in an oligopoly market 143) Cartel – multiple firms acting together as one firm a) Example of Cartel - OPEC – group of 11 major oil producing countries who attempt to control oil prices by limiting production a.i) Eliminates competitive pricing a.ii) Increases the firms price/profits
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(a.ii.1) Cartels were made illegal in the U.S by the Sherman Act of 1890 a.iii) Cartels are not stable since there are incentives within a cartel to “cheat” 144) Imperfect Competition is inefficient – (a.i.1) they can survive unlike Perfect Competition, efficiency is a requirement for long-term survival (a.i.2) produce output level where the Price (P) is greater than Marginal Cost (MC) (a.i.2.a) when price is greater than MC the firm is inefficient 145) Marginal Revenue a) Joe has a monopoly of tea, he sells 25 glasses of tea for $1 each, If he wants to sell 26 glasses, Joe can only charge $.97 per glass. What is the Marginal Revenue on the 26 th glass of tea sold? a.i) First determine total revenue for 25 glasses and 26 glasses, and then determine the difference between the two. (a.i.1) P1: 25 x $1.00 = $25.00 (a.i.2) P2: 26 x $.97 = 25.22 (a.i.3) P2- P1 = MR (a.i.4) 25.22 – 25.00 = $.22 (a.i.5) MR on the 26 th glass is $.22 146) Oligopoly Characteristics (a.i.1) Product Branding (a.i.2) Entry Barriers – anything that makes it difficult to enter the market (a.i.2.a) Ex: other brands, patents, copyrights, trademarks, and cost (a.i.3) Interdependent decision Making (most important characteristic of oligopoly) (a.i.3.a) If one Cell phone company lowers prices the other must, price wars do not lead to increased demand, they lead to decreased revenue for each firm. (a.i.3.b) For interdependent decision making to be effective the number of firms in the oligopoly must be small (a.i.3.c) This firms are the price makers and must strategically consider the reactions of the other firms in the market (a.i.4) Non-price competition – by providing higher quality products or characteristics (a.i.4.a) Ex: warranties, return-policy, store hours, things that match the consumers preferences (a.i.4.a.i) In the USA a current oligopoly is the Cell Phone industry a.i.4.a.i.1. Dominated by a few interdependent producers a.i.4.a.i.2. Very difficult to enter the market a.ii) When 5 or less make up 60% of a market, it is considered an oligopoly 147) Kinked Oligopoly Demand Curve – when competing firms follow price decreases but not price increases a) Assumptions made regarding the kinked demand curve: (a.i.1) If one firm raises its price, competition likely will not raise their prices in fear of losing market share (a.i.2) If a firm lowers its price, competitors will follow, so they do not lose market share b) Things to remember
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(b.i.1) The firms Marginal Revenue (MR) has a gap at the kink 2
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Since monopolistic competition is inefficient bii1 Price P...

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