Exam 2 Economics

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  1. What are the legal types of business in our economy?
    • 1. Plant- The physical establishment of a business
    • ex: the factory in manufactoring
    • -the store in retail
    • -the farm in agriculture

    2. Firm- the legal type of organization that runs and operates the plant (sole propriet, partnership, corporation, copperative

    3.Industy- A group of firms producing the same or similar products or services( auto industry, banking industry, etc)
  2. What are the four industy models to analyze Industry? What kinds of business make up each one? What are there characteristics?
    • FOUR industry models to analyze Industry?
    • 1.Pure Competition(PC)-
    • BUSINESS EXAMPLES: Cattle Ranches, Chicken and Hog Farms, Vegetable Farms, Rice/ Grain/ Dairy Farms , Stock Market
    • Number of Firms in Industry: 100,000+nationwide
    • Contorl over Price: Little to none (price taker)
    • Conditions of Entry for New firms: easy
    • Non Price Competition Used: little to non (advertising, trademarks, etc)

    • 2.Monopolisitc Competition(MC)-
    • BUSINESS EXAMPLES: All Small businesses (restaurants, dry cleaners, florists, mom and pop stores) Professional Offices (doctors, lawyers, dentists)
    • Number of Firms in Industry- a large number (thousands nationwide, hundred citywide)
    • Type of Product Sold Different
    • Control over Price some within Limits
    • Conditions of Entry for New Firms: Easy
    • Non Price Competition Used: Lots of advertising

    • 3.Oligoply(O)-
    • steel, aluminum, automobile, gypsum, petroleum, tire, and beer industries
    • Number of Firms in Industry: a few(<20Nationwide) the "big 32", Big "6", etc.
    • Type of Product Sold: Both standardized and different
    • Control over Price:Limited by Mutual Interdependence OR considerable with collusion (Before making price changes, each firm must cosider the reactions of rivals)
    • Conditions of Entry for New Firms: 1 Major Obstacle-Large Amount of Capital Needed
    • Non Price Competition Used: Lots of Advertising and their Gimmicks (advertising, trademarks, etc)

    4.Pure Monopoly(PM)

    • Unregulated:De Beers diamond CO. , Time Warner Microsoft, S.A Express News
    • Regulated:CPS, SAWS, VIA, other utility companies

    • Characteristics:
    • Number of Firms in Industry: 1 with at least 95 percent of the market (Price Market) The firm is the industry
    • Type of Product Sold: No real substitutes available to consumer
    • (standardized or different among firms in industry)
    • Control over Price: Absolute in UNregulated; Limited if regulated
    • Conditions of Entry for New Firms: Blocked(to contine earning ECON profits in LR)
    • Non-Price Competition Used: Some types of advertising used (advertising trademarks, etc:)
  3. At what point (output level) do the firms in each industy maximize their profit?
    • MR=MC
    • marginal revenue=marginal costs
  4. What kind of levels/prices exist in each industry

    • Prices Charged: Low
    • Output Levels Produced: High Profit

    • Monopolistic Competition
    • PRICES charged: Medium
    • Output levels Produced: Medium Profits

    • Oligopoly
    • Prices Charged: Medium
    • Output levels produced: Medium Profits
  5. How much control do the industries have over their prices?
    • control over price:limited by mutual interdependence or considerable with collusion(before making price changes, each firm must consider the reaction of its rivals)
    • Control over price: Some within limits
    • control over price:little to none (price taker)
    • control over price: absolute if unregulated; limited if regulated
  6. How efficient are each of these industries?
  7. What kind of profits (normal, economic, or losses) do the firms in these industries make?
    • Profits
    • SHORT RUN: ECON, Normal,Losses
    • LONG RUN: ECON (difficult for new firms to enter and compete away markets/profits)

    • Profits:
    • Short Run: ECON , Normal, Losses
    • Long Run:Economics as long as other firms can be kept out of the industry
    • Variation: some PM's may choose to earn <maximum profits
    • a)to prevent regulation
    • B) discourage entry of new firms (microsoft)

    • Profits
    • Short Run: Econ, Normal, or Losses depending on where price and cost levels are relative to each other
    • LONG RUN:

    • Profits:
    • LONG RUN: Normal (economic if firm has a superior location)
  8. WHICH industries use a lot of (or little) advertising?
    Which spend money on research and development?
    • Advertising: PR stuff, not about P or product
    • Research and Development: Possible from LR economic Profits

    • Advertising: NONE
    • Research and Development:NONE

    • Advertising: can be good or bad in any industry-depends on how its used by individuals
    • Research and Development: No LR profits for R&D

    • Advertising: use ads instead of P; gimmicks
    • Research and Development: LR profits allow for spending on R&D
  9. WHICH types of firms are most likely to get involved in price discrimination ? Collusion?
    • The firms must
    • 1) have some degree of monopoly power
    • 2)segment the market (keep customers payin the different prices apart)
    • 3)prevent customer paying lower price from reselling the good at a higher price

    Price Discrimination: Illegal when a firm sells the same product at different prices unjustified by cost differences.

    • Some types:illegal but acceptable
    • why do we accept it?
    • 1) bargaining for product is involved
    • 2)small amount of money is onvolved
    • 3)knowlege of price alternatives is available
  10. What is similar among the four industry models? Most different?
    • Similarities
    • 1. Cost: Computations are the same and the AVC, ATC, and MC curves to represetn them are all U shaped (based on law diminishing returns)
    • 2.Firms in all industries attempt to produce where profits max (MR=MC)
    • 3.In SR, profits can be Economic, Normal, Losses for firms in all 4 industries
    • 4..In LR, 2 earn NORMAL profits(PC /MC)
    • 2 earn ECONOMIC profts (O/PM-unregulated)

    • 1. Demand for product/ service is different for all 4 firms.
  11. In general did US industries become more competitive or more concentrated from 1900 to 1990?
    from 1900 to 1990 industries became more CONCENTRATED

    from 1990 to present became COMPETITION
  12. How is Industry concentration measured numerically by Concentration Ratios or the Herfindahl Index?
    • Concentration Ratio- sum of the market shares of the 4 or 8 largest firms in an industry.
    • higher=more concentrated industry
    • lower=more competitve industry


    herfindahl index sum of the squares of the market shares of ALL firms in the industry

    • 202 + 302 + 202 +202 +102
    • 400 + 900+ 400+ 400+ 100=2200
  13. The concentration of US industry from 1900 to 1990 can also be assesed historically from four waves of heavy merger activity. What are the types of mergers that occurred during the four waves?
    • 1) Horizontal Waves(1895-1905)
    • Firms in SAME industry merge
    • (recently exxon-mobil compaq-HP PCS)

    • 2. Vertical Mergers(1916-1929)
    • Frims in RELATED industries merge
    • (recently pay-pal, EBAY)

    • 3.Conglomerate Mergers (1957-1967)
    • Firms in DIFFERENT industries merge
    • (recently RJ Reynolds -Nabisco)

    4. All of Above Types of Mergers(1978-1990)
  14. What are 2 major antitrust laws exist to help protect consumers against potential abuses of firms in concentrated industries?
    • 1. Sherman Act 1890-prohibits collusion through 3 c's
    • CONSPIRACIES in restraint of trade

    • 2.Clayton Act 1914
    • prohibit: Price discrimination
    • Tying Agreement
    • Interlocked Directorates , etc
  15. the key variables computed and graphed to represent firms in the four industrises are P, Q, MR, MC, ATC
    , D and S. Hoare are MR , MC, ATC, computed? Can you dram the model to represent each firm/industry
    MR= change of total revenue/ change in quantity

    MC=change in total costs/ change in quantity

    ATC= total cost/ quantity
Card Set
Exam 2 Economics
Exam 2 Economics
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