Basic Economics

1) Economics the social science that focuses on the usage of resources2) Microeconomics branch of economics that studies use of resources by individuals, households, firms and industries3) Macroeconomics study of the national economy4) Production Possibility Curve (PPC) opportunity costs associated with two goodsa) Inefficient and unemployed resources operating inside the PPCb) Outward shift indicates economic growth

5) Economic Resources & payments a) Land all natural resources (raw materials) PAYMENT = RENTi) Ex: beach, crude oil, timber, oceans, mineral depositsb) Capital equipment and machinery (used to create goods) PAYMENT = INTERESTi) Ex: computers, buildings, assembly line machineryc) Labor intellectual and manual human attributes (human resources) PAYMENT = WAGESd) Entrepreneurship PAYMENT = PROFITS

6) Rent the money one pays to use someones land 7) Interest the money one pays to use someones capital8) Opportunity Costs are forgone or missed opportunities, tradeoffs, what one gives up to purse the next best alternative9) Opportunity Costi) ButterMilk (1) 010(2) 105(3) 200

ii) To determine opportunity cost divide 10 lbs of butter by 5 gal of Milk = 2

10) Opportunity Costs found by adding explicit costs and implicit costsa) Explicit cost you have to pay for access to the system (money well spent)b) Implicit you have to spend time studying (time well spent)

11) Absolute Advantage produce more of a good than another12) Comparative Advantage produce a good at a lower opportunity cost13) Normative economics based on the way someone believes Things ought to be - opinions not facts14) Positive Economics states facts based on empirical evidence, forms a hypothesis and tests it using scientific evidence15) Command Economy the government dictates production and consumption16) Free Market Economic System aka Capitalism supply and demand determine price of goods17) Mixed Market Economic system - blends free market (capitalism) with the government run (command system) 18) Adam Smith Scottish economist - father of modern economics, wrote The Wealth of Nations in 1776

Supply and Demand19) Law of Demanda) Increase in Price (P) = decrease in quantity (Q) demandedb) Decrease in Price (P) = increase in quantity (Q) demandedi) Demand is the relationship between the amount of goods that a consumer is willing and able to buy at the price ii) Inverse relationship between price and quantity

20) When demand decreases: market equilibrium price and quantity decreases21) Relative Price the price of one product expressed in terms of anther producta) Calculate relative price by dividing one by the otheri) An iPod is $100, Tv is $500 the Tv is 5 ipodsii) $10 movie ticket and $100 NBA ticket = relative price of NBA ticket is 10 movie tickets

22) Externality is the impact (cost or benefit) of a transaction on a party that is not directly involved in the transactionsa) Positive externality benefits people not directly involvedb) Negative externality causes harm for people that are not directly involvedi) Company dumps toxic waste in water supply, someone smoking in a restaurant, construction noise, neighbors barking dog

23) Positional Externality occurs when one party attempt so one up the othera) Jim buys wife a $1000 ring, friend Jon buys his wife a $2000 ring

24) Substitute Goods - goods that can be used in place of the othera) Pepsi & Coke

25) Complementary Goods Hot dogs and hot dog bunsa) When the price of one rises or falls the demand for the complimentary goods will also rise or fall

26) Law of Supply direct positive relationship between quantity supplied and pricea) Increase in price (P) = increase in quantity (Q) suppliedb) Decrease in price (P) = decrease in quantity (Q) supplied

27) Supply is the relationship between price of the good and amount of a good a firm is willing and able to produce28) Supply Curve Upward positive slopea) Slopes upward due to the direct relationship between quantity and price

29) Moral Hazard when people make less of an effort to avoid misfortunea) When someone doesnt honk when a crash will occur because he wants to sue the owner

30) Rational Self Interest Adam Smith a) Producers of goods and services that act in their own self interest will improve public welfare or public interesti) Ex: construction worker who builds a road, gets paid benefits him, others use the road benefits themb) Invisible Hand Theory by doing what is best for us, we ultimately do what is best for societyi) Invisible hand guided the free market towards public goodsii) The free markets thrive on the basis of mutual self interest

31) Inferior Products Walmart soda demand is increased when income is decreased32) Griffen an inferior good that does not have a substitute (bread) 33) Normal Products aka Superior Goods - Coke & Pepsi demand is increase when income is increased

34) Veblen goods snob goods, luxury cars, high end wines - status purchases a) Decrease in price causes a decrease in demand b) do not follow law of demandc) known as conspicuous consumption

35) Barter a direct exchange without using money36) Price Floor (5) = surplus(7) price cannot go below (floor stops it) a) Consumers must pay more than market, they no longer purchaseb) Companies are guaranteed higher prices and produce more

37) Price Ceiling (7)= shortage (8) price cannot go above (ceiling stops it) a) Shortage because suppliers cannot charge market prices so they produce lessb) Consumers can buy the same produce for less so they purchase morei) (remember this by letter counts match - more letters in the words 7/8 -ceiling and shortage, less letters in the words 5/7 floor and surplus) also C- comes before F in the alphabet so at the bottom is C of the equilibrium, at the top of the equilibrium is F.

38) Market Equilibrium where quantity supplied equals quantity demandeda) Equilibrium cannot occur when there is a price ceiling or floor.

39) Marginal Opportunity Cost the amount of another product you give up producing to one more unit of producta) Ex: if producing another pair of jeans means you produce 3 less shirts, the marginal opportunity cost of the jeans is 3 shirts

40) Scarcest Resources diamonds, platinum, golda) Most expensive due to limited supplyb) Used conservatively

Elasticity

41) Price Elasticity of Demand (PED) a mathematical formula to determine how much a change in price affects the quantity demandeda) The equation is % change in quantity demanded divided by % change in pricei) Ex: if a 20% off sale increased quantity demanded by 60%, = price elastic(1) 60/20=3(a) If the Price Elasticity of Demand (PED) is equal to 1, demand is unit elastic(b) If the Price Elasticity of Demand (PED) is greater than 1, demand is elastic (sensitive to changes in price) b) Applies to both supply and demandi) Inelastic Demand the quantity demanded rises or falls by a lesser % than the pricec) An increase in price results in a increase in total revenue, demand is Inelasticd) When the demand is price inelastic, raising the price will increase revenue

i) Elastic Demand the quantity demanded rises or falls by a greater % than the pricee) When demand is price elastic, even a small decrease can greatly increase revenue

i) Inelastic Supply the quantity supplied does not increase or decrease by as large a % as the priceii) Elastic Supply the quantity supplied increases or decreases by a greater % than the price

f) Graphically speaking if price and demand were a square box with the demand curve intersecting from top left downward to bottom right, the left half below the demand curve is price inelastic and the right half above the demand curve is elasticprice

g) SPLAT i) Substitutes if there are substitutes, the demand is more elasticii) Proportion of Income the higher the price of the good, the more elasticiii) Luxury vs. Necessity necessity (food) are inelastic we have to have it, while luxuries (sports cars) are elastic we want itiv) Addictive the more addictive a product is the more inelastic it is (cigarettes)v) Time the longer a consumer has to consider the purchase, the more elastic

h) A Price - Quantity - L - graph with a straight HORIZONAL line in the middle is a graph that demonstrates perfectly elastic demand.

i) A perfectly elastic demand is represented by a horizontal lineii) Slope = zeroiii) If a good is perfectly elastic, even a small increase in price will cause the demand to drop to zeroi) A Price - Quantity - L - graph with a straight VERTICAL line in the middle is a graph that demonstrates perfectly inelastic demand.

i) Perfectly inelastic demand is represented by a vertical lineii) Slope = infinity iii) Changes in price do not effect demand

42) Unit Price Elastic when the total revenue (TR) is the same regardless of price a) When an increase or decrease in prices does not change the total revenue (TR) = Unit elastici) 1.00 x 100 = 100ii) 2.00 x 50 = 100

43) Cross-Price Elasticity of demand measures the effect that a change in the price of one good has on the price of another gooda) Cross Price Elasticity of Demand = % of change in the quantity demanded for good X divided by % change in price of good Yb) Negative cross-price elasticity when the demand of two goods are complementsc) Positive cross-price elasticity when the demand of two goods are substitutes

44) Utility the satisfaction a consumer receives as a result of purchasing a good or service45) Marginal Utility is the satisfaction from each additional unit consumed46) Total Utility the satisfaction received from all of the product consumeda) When total utility is maximized marginal utility is zero

47) Diminishing Marginal Utility a) Ex: all you can eat buffet, not as much satisfaction is received from the last plate as the first plate

48) Reservation Price amount that a consumer is willing to pay for a gooda) Difference between reservation price and actual price is consumer surplus

49) Consumer Surplus graphically illustrated ABOVE the market price and below the demand curve the triangle above the market equilibrium pricea) The difference between what a consumer is willing to pay and what he actually paidi) Willing $10 actually paid $3 = $7 consumer surplus

50) Producer Surplus graphically illustrated ABOVE the market price and above the supply curve the triangle above the market equilibrium price

51) Total Revenue (TR) = Price (P) x Quantity (Q)

52) Deadweight the total surplus (producer + consumer surplus) lost as a result of taxes, market imperfections or other factorsa) a loss when the price is increased above market level and results in a loss to both the consumer surplus and producer surplus

Wages and Labor

53) Transfer Payments Medicaid, Medicare, social security, food stamps, housing assistance, welfare54) Lorenz Curve economists consider this to be a measure of social inequality55) Gini Ratio another measure of social inequalitya) Gini ratio of zero (0) means each family has equal incomeb) Gini ratio of 1, means that one family is receiving 100% of the income in society

56) Income Effect a change in consumption (up or down) as a result of a change in real income

57) Real Income is actual income adjusted for all other factors including increasing prices of goods and services as well as inflation58) Non-Rival Good - is a good that has zero marginal cost for providing the good to additional consumers59) Rival Goods Private goods, T.V. 60) Non-Exclusive Good Common Goods, and Public goods a) is a good everyone has access to (no one can be excluded) 61) Excludable Private Goods and Club goods

1. Excludable Non-Exclusive62) RivalPrivate Goods (cars)Common Goods (national parks) 63) Non-RivalClub Goods (cable t.v.)Public Goods (national defense)

64) Public Goods aka Collective goodsa) Ex: national interstate system, military (national defense), education, law enforcementi) People do not pay for public goods, they are available to everyoneb) Non-rival and Non-exclusive65) Progressive Tax increases as income increasesa) Most effective way to deal with income disparity66) Proportional Tax aka Flat Tax has no effect on income inequalitya) Ex: 20% tax for everyone67) Regressive Tax a tax that imposes equal amounts on employees and employers a) Ex: social security

68) Prospective Payment System (PPS) a system implemented in 1980s as a result of rapid healthcare costs that pays the same amount (one price) to hospitals and doctors based on the service. a) A preset reimbursement rate

69) Total Physical Product (TPP)

70) Marginal Physical Product (MPP) - the extra output gained by one more unit of inputa) Examines the TPP prior to adding a unit of input and again after adding a unit of input b) MPP = TPP (after unit is added) TPP (prior to adding unit) 71) Marginal Revenue Product (MRP) is additional revenue that can be earned by adding one unit of labora) As long as marginal revenue is greater than or equals one unit of labor, the firm should hire additional workerb) A firm should continue to hire workers until:i) MRP = Wages (W) (marginal revenue product = wages)c) Since Wages (W) is the same thing as Marginal Expenditure (ME), the formula can also read:i) MRP=ME (marginal revenue product = marginal expenditure) d) An increase in the price a firms product will increase the firms demand for labor

72) Positive Number - Marginal Physical Product if the total output of a product does increase when variable resources are added, such as labor

73) Negative Number Marginal Physical Product if the total output decreases when variable resources are added.

74) Average Physical Product (APP) - average amount produced per worker, it does not look at marginal physical product (MPP)a) Found by dividing the total amount by the number of workersi) 1 worker = 20 loavesii) 2 workers = 33 loavesiii) 3 workers = 43 loavesiv) 4 workers = 49 loaves v) 5 workers = 50 loaves(1) APP = 10 loaves (50/5) (2) With 5 workers the MPP is one loaf of bread(3) The diminishing returns occurs when the 3rd worker is added(4) TPP increased after adding each worker

75) Law of Diminishing Returns if adding an additional worker does not provide as great a benefit as adding the last workera) When does the law of diminishing returns begin?i) 1 worker produces 15 units (+15)ii) 2 workers produce 35 units (+20)iii) 3 workers produce 40 units (+5)iv) 4 workers produce 44 units (+4)b) When the 3 worker is hired

76) Herfindahl Index measures whether an industry is a monopoly or perfectly competitivea) Used by the Federal Trade Commission and Justice Department to evaluate whether or not a monopoly is presenti) Herfindahl index of zero (0) is perfectly competitiveii) Herfindahl index of 10,000 indicates a monopolized industry

77) Total Costs ( TC) 78) Total Variable Costs (TVC)79) Average Variable Costs (AVC)80) Fixed Cost (FC) 81) Wages (W) 82) Quantity of Labor (QL)

83) Fixed costs are $75 and 3 workers earn $150 per day, determine the total costs and average variable costs of producing 30 units

84) Total Costs = $525a) TC = FC + (QL x W)b) TC = $75 + (3 x $150)c) TC = $52585) Average Costs = $15a) TVC = TC FCb) TVC = ($525 - $75)c) TVC = $450d) AVC= $450/30e) AVC = $15

86) Public Interest Theory when government regulates/intervenes with the business markets it is protecting the best interests of society

87) Taxation the main method the Federal government addresses the income disparitya) USA uses a progressive tax system, the wealthier pay more, which helps redistribute wealth

Firm Basics

88) Average Fixed Cost (AFC) fixed costs remain the same whether 1 or 100 products are produceda) Continuously decreases as the output increasesb) When a firm increases production, the average fixed costs will always decrease ??c) Slopes downd) Bottom downward sloping line on the price/quantity graphi) Fixed cost include rent, insurance, mortgages, and equipment

89) Average Total Cost (ATC) if process are set below this curve the firm loses moneya) But they can continue operations in the short run

90) Total Costs are calculated by adding total variable costs (TVC) and total fixed costs (TFC) togethera) TC=TVC + TFC

91) Marginal Cost (MC) the increase in total cost when one unit of output is addeda) how much does it cost to produce the additional unit?i) 0 units - $35ii) 1 unit - $44iii) 2 units - $52iv) 3 units - $59v) 4 units - $64vi) 5 units - $71vii) 6 units $79b) What is the marginal cost to produce the 4th unit = $5i) TC of unit 4 minus TC of unit 3ii) $64-$59= $5

92) Total Fixed Cost (TFC) a) If a baker can produce $100 cakes for an average total cost of $16. His average variable cost (AVC) is $10. What is the total fixed cost (TFC) ? = $600i) TC = 100 x $16 = $1600ii) TVC = 100 x $10 = $1,000iii) TFC=TC ($1600) TVC ($1000)iv) TFC = $600(1) To also find AFC simply divide the $600 by 100 (quantity produced)(2) AFC = $6(3) AFC=TFC/Qv) Fixed costs are the same regardless of the number of units produced, if the cost to produce 0 units is given this is the fixed cost.b) If the firm is producing 5 units of output, the Average Fixed Cost (AFC) is? $7.00i) 0 units - $35ii) 1 unit - $44iii) 2 units - $52iv) 3 units - $59v) 4 units - $64vi) 5 units - $71vii) 6 units $79(1) AFC = TFC / Q(2) AFC = $35 / 5(3) AFC = $7.00viii) Remember the TFC are the costs associated with zero units of output

93) What is the Average Variable Cost (AVC) if the firm is producing 3 units of output? $8.00i) 0 units - $35ii) 1 unit - $44iii) 2 units - $52iv) 3 units - $59v) 4 units - $64vi) 5 units - $71vii) 6 units $79b) Total Variable Costs = Total Costs ($59) Fixed Costs ($35)c) Total Variable Costs = 24d) Average Variable Costs = TVC ($24)/Quantity (3)e) AVC = $8.00i) Average variable Costs will fluctuate based on the number of units produced

94) Economic Profits = Total Revenue (TR) (explicit + implicit costs) a) Economic Profits Method includes opportunity cost (implicit and explicit costs)i) Ex: of implicit costs: owner working for free, owner investing in capital, or using personal resource(1) Implicit Costs are the opportunities foregone to run a businessii) Ex. of explicit costs: wages, rent, materials

iii) If Jim spends 2 hrs building a table instead of working at his $20 hrs job, the supplies for the table cost $45, and he sells the table for $100. Jims Economic Profits are:(i) Economic Profits = Total Revenue (explicit + implicit costs) (ii) Economic Profits = $100 85 ($45 (supplies) + $40 ($20 per hr wages x 2 hrs))(iii) Economic Profit = $15

b) Accounting Profits = total revenue explicit costs (does not include implicit cost)i) Ex. of explicit costs: wages, rent, materialsii) If Jim spends 2 hrs building a table instead of working at his $20 hrs job, the supplies for the table cost $45, and he sells the table for $100. Jims Accounting are:(a) Accounting Profits = Total Revenue (minus explicit costs ) (b) Accounting Profits = $100 45 (supplies)(c) Accounting Profit = $5595) Negative Economic Profits occur when total costs (including opportunity costs) are greater than revenue

96) ATC = ATC + AFCa) Average Total Cost is equal to the sum of average fixed costs (AFC) and average variable cost (AVC)i) Ex of fixed costs: rent, equipment, taxes, insuranceii) Ex of variable costs: labor, utilities, and production related materialsb) The average total cost curve ATC curve ALWAYS intersects the AVC and ATC at the lowest points

97) Average Total Cost (ATC) a) When they produce 4 units of output (below) the ATC per unit is ?i) 0 units - $35ii) 1 unit - $44iii) 2 units - $52iv) 3 units - $59v) 4 units - $64vi) 5 units - $71vii) 6 units $79b) Average Total Cost (ATC) can be found using this formulai) ATC = TC/Qii) ATC = $64 / 4iii) ATC = $16.00

98) Total Costa) TC = (AVC + AFC) / Quantity ??

99) Average Variable Cost (AVC) - if prices are below the minimum point on this AVC curve the firm should shut down100) Economies of Scale decreased costs per unit as a result of increased productiona) Example: when a firm doubles its input and triples output (lower ATC)i) If a firm triples input and triples output neither (equal ATC)ii) If a firm quadruples its input and triples output diseconomy of scale (higher ATC)

101) Diseconomies of Scale when increased output leads to increased per unit costs

102) Short Run a period of time during which some of the expenses are fixed and supply cannot fully adjust to changes in demanda) Fixed costs do not change in the short run

103) Long run there is no such thing as fixed costs ALL costs are variable, supply has adjusted to changes in demand

104) Optimum Profits a firm should produce at a point where a) Marginal Revenue (MR) = Marginal Costs (MC)b) Firms should produce up to the point where: Marginal Revenue (MR) = Marginal Cost (MC)i) Q1 to increase profits, increase productionii) Q2 profits are maximized (MC = MR) iii) Q3 to increase profits, decrease production

105) Normal Profits is the minimum profit necessary for a firm to survive in a perfectly competitive marketa) Markets with normal profits will neither expand or shrink, they are in a state of long-term equilibriumb) In a free market normal economic profits are Zero

106) When Marginal Revenue (MR) is below ATC, the firm is losing moneya) The firm is selling products for less than it costs to produceb) Firms should produce up to the point where: Marginal Revenue (MR) = Marginal Cost (MC)

107) Breakeven points for a firm is where?a) The point that lays at the intersection of the Average Total Cost (ATC) and the marginal cost (MC)i) ATC all costs divided by quantityii) MC the cost to make one additional unit

108) Marginal Revenue is the amount of revenue that is generated by selling one more unita) MR = Total Revenue / Total Quantity (Q)

109) Rules of Normal Profits:(1) A firm will only achieve normal profits in the long run(2) A firm that has sub-normal profits will probably close shop in the long run this will drive up profits(3) A firm that has super-normal profits will attract new competition (a) Firms enter in the long run and drive profits downb) Lower than normal profits are known as sub-normal and firms exit the market

110) Shut Down Points : i) Long Run the minimum price point is Average Total Cost curve (ATC)(1) If the price drops below the minimum on the ATC curve, the firms cannot make money and will shut downii) Short Run the minimum price point is on the Average Variable Cost curve (AVC)

111) Average Fixed Costs (AFC) = Total Fixed Costs (TFC) divided by Quantity (Q)

112) Total Revenue Total Cost = Profita) A firm must maintain a large difference between the cost of production and revenueb) The optimum level of production is:i) MR (marginal Revenue) = MC (marginal Cost)

113) Marginal Cost (MC) curve will ALWAYS cross the Average Total Cost (ATC) curve at the minimum average variable cost (AVC) curve

114) Marginal Cost (MC) is the increase in total cost that occurs when one unit of output is addeda) In contrast Marginal Revenue (MR) is the additional revenue from one unit increase in output

Perfect Competition

115) In a perfect competition, Price (P) = Marginal Cost (MC) a) P=MC simply means that the price that a firm is selling their product is equal to marginal cost to produceb) Price of a product is equal to minimum average cost

116) Normal profits mean Zero .00 economic profitsa) Normal profits occur when Price (P) = Average Total Cost (ATC) at the bottom of the ATC curve

117) Long Run equilibrium dictates perfectly competitive firms have an economic profit of zero aka, normal profit.a) When firms are making an economic profit new firms enter the market and drive profits to zerob) When firms are losing money, firms exit the market and prices go upi) Due to barriers of entry, a monopoly can generate greater than zero economic profitsc) In the long run firms enter and exit a perfectly competitive market until firms are earning zero economic profits (normal profits)

118) Long Run Equilibrium occurs in a perfectly competitive firm when Average Total Cost (ATC) is at the minimum point on the ATC curve(1) In Long Run equilibrium all of the following apply:1. Quantity Demanded = Quantity Supplied2. Zero economic profits are made3. Optimum Production level is Marginal Revenue (MR) = Marginal Cost (MC)4. Price (P) = Minimum Average Cost5. Price (P) = Marginal Revenue

119) Short Run in the short run profits and losses can be made by firmsa) To maximize profits and minimize losses firms should produce at a level where Marginal Revenue (MR) = Marginal Cost (MC)b) When perfectly competitive firms earn Short Run economic profits, more firms enter the market

120) Firms primary decision is the Quantity (Q) to producea) Marginal Revenue(MR) = Marginal Cost (MC) = optimum production Quantity (Q)

121) Price-Takers firms must sell at the market dictated price

122) Barriers to entry anything that makes it difficult for new firms to enter the marketa) Example: political, legal and regulatoryb) With perfect competition, barriers are minimal or non-existent

123) Perfect Competition a market that has many firms providing many buyers with the same product

124) Characteristics of perfect competition are:(1) There are many firms and many consumers selling the same products(2) Each firm is a price-taker (firms are unable to influence price causes horizontal demand)(3) There are no barriers of entry(4) Both the consumers and firms have perfect information (all consumers and producers know the price and quality of all the competitions products) (5) Each firm selling the same productii) It is difficult to influence the market due to the large number of firms and consumers in perfect competition marketiii) Firms do not advertise in a perfectly competitive market(1) Products are homogeneous (the same) no need to differentiate one producers peaches from anothers peaches.

125) Demand Curve i) Horizontal for a firm implies perfect elasticity and any increase in price would result in zero demand for the firms product, the firm is a price taker not a price makerii) Downward sloping in the markets demand

126) Product Markets(1) Perfect Competition many firms selling a product(2) Monopolistic Competition quite a few (more than oligopolies and monopolies) (3) Oligopoly there are few sellers who are interdependent(4) Monopoly one seller (no close substitutes) ii) The more competition a firm faces the more efficient the firm becomes

Imperfect Competition

127) Monopoly prices are higher than Marginal Revenue (MR)

128) Monopoly one firm who makes up an entire industry no substitutesa) Barriers make it virtually impossible for new firms to competeb) Monopolist are price makers and will charge whatever the market will bear

129) Criteria for Illegal Monopoly(1) Inelastic demand increase in price does not decrease demand(2) Not Cross-Elastic no valid substitutes for the product (Ex. gas) (3) Market Share is greater than 70%(4) Illegal use of the monopoly power

130) Legal Monopolies aka Natural Monopoly - Utility Companiesi) Entry into the market has such a high cost that tow competing firms could not make money(1) t is illegal to compete against a legal monopolyii) Most common type is one who holds a patent or permit, preventing other firms from competingiii) Less common is a monopoly that has law designed to protect it from competition(1) Example: U.S. Post Officeb) Meet the first three criteria for an illegal monopolyc) If they raise prices unreasonably or without cause they would be subject to antitrust laws

131) Sherman Antitrust Act of 1890 makes actions that restrain trade illegal a) Price-fixingb) Production quotas per se violation agreement to restrict supply to increase pricec) And agreements between competitors that cartels use to influence demand

132) Clayton Antitrust Act of 1914- created to address the rule of reason and actual adverse impact loopholes in the Sherman Act of 1890a) Clayton Act - Most famous for prohibiting mergers and acquisitions that create monopoly or reduce competition

133) Rule of Reason antitrust doctrine, which originated from a U.S. Supreme Court ruling (1911) allows restraint of trade if:(1) There is a legitimate business purpose(2) Trade is economically efficientii) When economically efficient and related to valid business purposes, the rule of reason allows unintentional and reasonable restraints of trade

134) Interlocking Dictatorship when a person serves as the director of two or more competing companiesa) Prohibited by the Clayton Act of 1914

135) Vertical Agreements with antitrust concerns are:(1) Tie-in Agreement customers have to buy a product (they dont want) to get another product(2) Price Discrimination different people are charged different prices for the same product(3) Exclusive Distributor only one distributor can sell a product(4) Exclusive Dealing a distributor can only sell one manufacturers productii) Vertical agreements are agreements with the buyers and sellers.

136) Horizontal Agreements an agreement between two businesses that are in competition a) A per se violation of the Sherman Actb) Reduces competition

137) Per Se violation an action that is considerer anti-competitive and intrinsically illegala) Examples of per se violations:(1) Price Fixing - when several competitors agree to raise the price of a product results in a higher price than the market can bear(2) Price Discrimination - when a firm charges two parties different prices for the exact same product or service

138) Potential Entrant Effect - when the potential of a new competitor drives businesses to efficiency and lower prices for the consumeri) Conglomerate Mergers can be challenged on the basis of Potential Entrant Effect if:(1) The threat of potential entrant influenced the industry(2) Company could have entered the market without the merger taking place(3) The number of potential entrants is smallii) The problem with mergers and acquisitions is it can eliminate the potential entrant effect

139) Group Boycotts per se violations of the Sherman Act of 1890 occurs when a group of companies pressure a manufacturer to terminate its relationship with one companya) Definitions i) Group Boycott because of pressure from many retailers, a manufacturer decides to not longer sell to an individual retailerii) Refusal to deal a manufacturer decides to no longer sell to a retailer

140) Market Division is when competitors in the same industry divide up a large territory into segments, a) Restricts customers access to a free marketi) by dividing the territories they create monopolies ii) a per se violation of the Sherman Act of 1890, iii) Also known as Horizontal Territorial Limitations

141) Monopolistic Competition is the most prominent type of market structure in the United Statesa) Monopolistic competition is inefficient due to excess capacityi) Ex: a restaurant that is only busy at lunchii) Produces less output than perfect competition and the output it produces is at a higher priceb) In the long Run a monopolistic competitor will make normal profits (economic profits are zero in the long run) similar to a perfect competitori) With one difference:(1) Monopolistic Competition: Price (P) = Average Total Cost (ATC) NOT at Minimum(2) Perfect competition: Price (P) = Average Total Cost (ATC) at the Minimum ii) Since monopolistic competition is inefficient(1) Price (P) is greater than Marginal Cost (MC) (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 firma) Example of Cartel - OPEC group of 11 major oil producing countries who attempt to control oil prices by limiting productioni) Eliminates competitive pricingii) Increases the firms price/profits(1) Cartels were made illegal in the U.S by the Sherman Act of 1890iii) Cartels are not stable since there are incentives within a cartel to cheat

144) Imperfect Competition is inefficient (1) they can survive unlike Perfect Competition, efficiency is a requirement for long-term survival(2) produce output level where the Price (P) is greater than Marginal Cost (MC) (a) when price is greater than MC the firm is inefficient

145) Marginal Revenuea) 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 26th glass of tea sold?i) First determine total revenue for 25 glasses and 26 glasses, and then determine the difference between the two. (1) P1: 25 x $1.00 = $25.00(2) P2: 26 x $.97 = 25.22(3) P2- P1 = MR(4) 25.22 25.00 = $.22(5) MR on the 26th glass is $.22

146) Oligopoly Characteristics(1) Product Branding(2) Entry Barriers anything that makes it difficult to enter the market(a) Ex: other brands, patents, copyrights, trademarks, and cost(3) Interdependent decision Making (most important characteristic of oligopoly) (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. (b) For interdependent decision making to be effective the number of firms in the oligopoly must be small(c) This firms are the price makers and must strategically consider the reactions of the other firms in the market(4) Non-price competition by providing higher quality products or characteristics(a) Ex: warranties, return-policy, store hours, things that match the consumers preferences(i) In the USA a current oligopoly is the Cell Phone industry1. Dominated by a few interdependent producers2. Very difficult to enter the marketii) 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 increasesa) Assumptions made regarding the kinked demand curve:(1) If one firm raises its price, competition likely will not raise their prices in fear of losing market share(2) If a firm lowers its price, competitors will follow, so they do not lose market shareb) Things to remember(1) The firms Marginal Revenue (MR) has a gap at the kink 2 (2) Prices above the current price are relatively elastic(3) Prices below the current price are relatively inelastic

148) Federal Trade Commission (FTC) works with the Justice Department to protect free tradea) FTC handles civil actions b) U.S. Justice Department can handle civil and criminal actionsi) They have the power to:(1) Break up firms(2) Discourage through taxation(3) Price floor(4) Price ceilings(5) Prevent mergersii) Granted these powers through the Sherman Actc) Can exercise power through:i) Advising counsel regarding legalityii) Consent decrees FTC agrees not to fine a business if they ceaseiii) Cease and Desist Orders tells a business to stop breaking laws or face finesiv) Extreme Measures order a business to sell off assets or dissolve itself

149) Federal Trade Commission Act of 1914a) Outlawed i) unfair or deceptive business practicesii) Unfair methods of competitionb) Created a commission to investigate and enforce

150) Competition causes firms to be efficient

151) Perfect Competition markets have:(1) The most substitute products available(2) The most elasticity(3) Largest number of sellers(4) Firms that are price- takers(5) THE GREATEST OUTPUT!!

152) Barriers affect different market types:i) Perfect Competition no barriers to entry or exitii) Monopolistic Competition weak barriers may existiii) Oligopoly large barriers prevent most entryiv) Monopoly complete barriers prevent all entry

153) Nash Equilibrium is a strategy that requires each firm to base its decisions on the strategies of other firmsa) Seeks a point where each firm gains the same amount of utility