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18 Cards in this Set
- Front
- Back
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What is the Invisible hand?
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In economics, invisible hand is the term economists use to describe the self-regulating nature of the marketplace.
This is a metaphor first coined by the economist Adam Smith. |
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What is Allocative efficiency?
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Allocative efficiency is a type of economic efficiency in which economy/producers produce only that type of goods and services which are more desirable in the society and also in high demand.
Marginal benefit is equal to marginal cost (MB=MC). At this point the social surplus is maximized. |
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What is Productive efficiency?
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Productive efficiency occurs when the economy is utilizing all of its resources efficiently, producing most output from least input.
The concept is illustrated on a production possibility frontier (PPF) where all points on the curve are points of maximum productive efficiency. |
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Describe the "New Economy."
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The New Economy is a term to describe the result of the transition from a manufacturing-based economy to a service-based economy. This particular use of the term was popular during the Dot-com bubble of the late 1990s.
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What is Market Failure?
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Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient.
-The drop in social welfare provides the gov't justification to interfere with affected market |
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What is profit maximization?
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In economics, profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit.
MR=MC Competitive Markets: P=MC=MR |
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Describe Free Entry?
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Firms can freely enter the market for an economic good by establishing production and beginning to sell the product.
Free entry is implied by the perfect competition condition that there is an unlimited number of buyers and sellers in a market. |
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What are the conditions for perfect competition?
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1. Homogenous products
2. Large number of buyers and sellers 3. Perfect information 4. Absence of serious babies to entry and exit |
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In perfect competition, how do you profit maximize IN THE LONG RUN?
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Conditions:
P= LMC=SMC and SAC = LAC |
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What outcomes do antitrust laws seek?
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1. Explicit and harsh penalties- to deter
2. Substantial restructuring- restore competition 3. Cease-and-desit orders- encourage competition |
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Why does the gov't need to be cautious when intervening?
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1. Antitrust litigation is expensive. Must be done when loss of welfare outweighs cost of litigation
2. Monopolies can self repair with technology and other factors 3. When there are profits, others will eventually enter (sometimes) |
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Use the definition of marginal revenue to explain why marginal revenue is negative over some range of the demand curve.
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Marginal revenue must be negative over some range of the demand curve because, at some point, a monopolist must lower price on all previous units a sufficiently large amount that it more than offsets the gains of selling the additional unit.
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When should a firm shut down?
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P < AVC
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What are entry barriers for firms seeking to enter a monopolized industry?
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1. Patents, copyrights, and trademarks
2. Control of an essential raw material 3. Natural monopoly/ economies of scale 4. Government franchise (postal service) 5. Other sources (sunk costs of entering industry) |
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Do monopolies increase, decrease or maintain the level of innovation?
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According to Arrow, there is a lower cost reducing incentive for monopolies, therefore they are likely to innovate less.
According to Demsetz, monopolies will always use less inputs. Therefore per unit cost is equal in both monopolized and competitive industries. According to Yameny, Demsetz implies that monopolies buy inventions outright, rather than licensing it with royal payments. |
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Describe a bilateral monopoly.
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A market that has only one supplier and one buyer.
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What is the economic argument in favor of an antitrust policy that discourages monopoly.
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When a monopolist increases prices (to capture monopolist profits), quantity demanded decreases, and quantity supplied decreases. Society is therefore worse off.
Loss of social welfare. |
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Suppose small producers are inefficient producers. If antitrust policy sought to promote small producers, would this be inconsistent with the promotion of consumer welfare? Explain.
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Consumers would not be economically better if inefficient firms are protected from larger, more efficient firms.
Economies of scales play a role, usually. |
