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ECON1101 Chapter Notes - Chapter 1: Imperfect Competition, Monopolistic Competition, Deadweight Loss

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gilbear
18 May 2018
School
UNSW, UNSW Sydney
Department
Economics
Course
ECON1101
Professor
All

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ECON1101
● Price will be $25 and consumers will buy 6,000 books in total (4,000
domestically, 2,000 in imports)
● The impact on consumer surplus is the same as the tariff; it falls by
H+I+J+K
● Surplus of producers will rise by H again
● The area J will go to importing agents (they buy at $15 and sell at $25)
○ If the government charges a fee to importing agents, then
government revenue would be the same as tariff revenue
● Deadweight loss is also I + K
Chapter 7: Imperfectly Competitive Markets
● Refer back to the characteristics of perfectly competitive markets. An
imperfectly competitive market fails to satisfy at least one of those
categories
● Market Power: A firm has market power if it has the ability to set its own
price
● Firms with market power are said to be price makers or price setters, in
that they have the ability to set their own prices
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ECON1101
○ If a price-setting firm increases prices, it does not lose all its
customers (just some)
○ This is in contrast to a price taker where if they raise prices, they
lose all
customers
● A market composed of firms that are price-setters is said to be an
imperfectly competitive market. There are three main forms of imperfectly
competitive markets:
○Monopoly: There is only one firm in the market. Hence, the
individual’s demand curve coincides with the market’s demand curve
○Monopolistic competition: There is a large number of firms, each
producing a slightly differentiated product.
○Oligopolistic Competition: There is a small number of firms that
sell goods that are close substitutes
Determinants of Market Power
● As soon as there are barriers to entry, market power is likely to arise. A list
of barriers to entry include:
○ Control over scarce resources: If a firm has exclusive control over
key inputs of production, it might be impossible for other firms to
enter the market
○ Government-Created Barriers to Entry: This is through issuing
patents, offering copyright protection or granting licenses. If a
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Document Summary

Price will be and consumers will buy 6,000 books in total (4,000 domestically, 2,000 in imports) The impact on consumer surplus is the same as the tariff; it falls by. Surplus of producers will rise by h again. The area j will go to importing agents (they buy at and sell at ) If the government charges a fee to importing agents, then government revenue would be the same as tariff revenue. Deadweight loss is also i + k. Refer back to the characteristics of perfectly competitive markets. An imperfectly competitive market fails to satisfy at least one of those categories. Market power: a firm has market power if it has the ability to set its own. Firms with market power are said to be price makers or price setters, in price that they have the ability to set their own prices. If a price-setting firm increases prices, it does not lose all its customers (just some)

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Related Questions

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.

"Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar."

How could we argue that these markets are not competitive?

Select one:

a. Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.

b. The individual grocery stores or gas stations do not have the power to control price on many items that they sell, so they are not able to compete on price.

c. They usually purchase products from the same distributor: i.e., all grocery stores and gas stations buy their Coke products from the same Coke distributor. Thus, individual grocery stores do not really compete with each other; same for individual gas stations.

d. Each grocery store or gas station is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.

Could each firm face a demand curve that is not perfectly elastic?

Select one:

a. No; since customers aren't willing to spend their morning visiting each grocery store or gas station in a large city to find the best deal, then each firm's demand curve will be perfectly elastic since consumers do not have full information.

b. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.

c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.

d. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.

How profitable do you expect grocery stores and gasoline stations to be in the long run?

Select one:

a. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.

b. Because of rising prices of both food and gasoline, each of these industries is expected to suffer long-run losses for the foreseeable future.

c. Grocery stores would be expected to enjoy long-run positive profits since they sell a wider variety of products; gasoline stations would be expected to break even or take losses in the long run because of their more limited range of products.

d. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.

Can you explain to me the reasoning behind the answers?