EXAM TWO STUDY GUIDE

  This exam covers chapters 11, 12(sect. 1-4), 17, and 9 in the Ackerman textbook. 

General Topics

       Profit maximization: the motive and the consequences 

       Short-run versus Long-run equilibrium (The long-run is a period of time when all inputs are variable but also where econ. profits are zero for perfect competition)

       Barriers to entry: economies of scale, product differentiation, distribution networks, brand loyalty, patents 

       Anti-trust laws (Sherman Anti-trust Act, Clayton Act, Federal Trade Commission Act)

       Economic profit and normal profit  (economic profits are present when Price > ATC;  normal profits part of costs)

       The characteristics of perfect competition, oligopoly, monopoly, and monopolistic competition

       Perfect competition: free entry, firms sell identical products, many small firms, no control over price, long-run zero ec. profits (P = ATC at minimum ATC),  price is marginal revenue, profits are maximized at output level where P = MC. No example of perfectly competitive market, except farming is a very competitive industry -- individual farmers have no control over price. 

         Oligopoly: a few large firms, significant barriers to entry, avoid price competition, concentrate on product differentiation, various price theory models, price is above marginal revenue, profits are maximized at output level where MR = MC.  See Coca-Cola and Pepsi Cola -- the so-called Cola Wars. 

        Monopoly: One firm, no entry, price is above marginal revenue, economic profits earned in both short-run and long-run (price above ATC),  profits maximized at output where marginal revenue equals marginal cost, violates anti-trust laws, numerous legal hurdles to defining monopoly practices -- see Microsoft example.

        Monopolistic Competition: Many small firms, ease of entry, product differentiation, price is above marginal revenue,  economic profits zero in long-run equilibrium, long-run equilibrium at price above minimum ATC but equal to ATC,  considerable excess capacity -- see examples of service stations, convenience stores and product markets like cigarettes (even though tobacco industry is oligopolistic).

Graphs, Terms and Concepts

• Short-run is a period of time when some inputs are fixed, hence there are fixed costs.

• Long-run is a period of time when all inputs are variable. There are no fixed costs, everything can change.

• Economies of scale is when increased production causes average total cost to fall. 

• Price Discrimination occurs when a firm is able to charge everyone their reservation price.

• Consumer Surplus is the area above price and below the demand curve (the reservation price of the buyer)

• Producer Surplus is the area below price and above marginal cost. The firm paid only MC to produce a given unit but sold it for the given price.

• Economic profits attract new rivals (assuming free entry), shifting market supply rightward and decreasing price

• Profit-maximizing rule: produce at the output level where marginal revenue equals marginal cost.

• Perfect competition (price = marginal revenue = demand curve; long-run:  zero economic profits, minimum long-run average costs).

• Monopoly (price > marginal revenue; firm still makes economic profits in long-run)

• Natural monopoly (significant economies of scale, average costs decline throughout market range)

• Oligopoly (price > marginal revenue, a few sellers, non-price competition, tempted to collude). Understand the payoff matrix.

• Monopolistic competition (price > marginal revenue, long-run:  zero economic profits, excess capacity)

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• Short-run and Long-run profit-maximizing (loss-minimizing) positions for each market structure

• Price Discrimination (sell products to consumers at a price equal to their reservation price)

• Deadweight Loss is the area of the triangle representing lost consumer and producer surplus resulting from the imposition of a per unit tax. (see the comment cards for a graph). It also occurs when firms in "markets with power" set price above the equilibrium position for a perfect competitor.

• Payoff Matrix explains how oligopoly (duopoly in this case) markets choose between price competition (rarely) or a pricing strategy that results in non-price competition. Sometimes there are price wars and sometimes outright collusion (they decide on price together -- against anti-trust laws).

• Regulatory Functions include among others: establishing property rights, enforcing contracts, providing for those who are non-earners (elderly, children), ensuring financial stability. 

• Open Access Resources can be non-excludable and diminishable or diminishable. Diminishable open access resources (clean air, world's fisheries) are often over-exploited to extinction. 

• Income Distribution is measured by the Gini Coefficient and illustrated with the Lorenz Curve. Expect a question asking for a simple explanation -- no calculations. 

1. Expect a question on the film The Corporation.

2. Expect a question on the equity goal of a society regarding the distribution of income.

3. Expect a question on Microsoft and/or how the profit motive can lead to bad results depending on the type of market structure.