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Flashcards

ECON201 Viktoria

Guy Turner English 94 cards

ECON201 Viktoria

Cards in this deck (94)

  1. 1What are the characteristics of a monopoly?- Single seller serving the entire market with no close substitutes
    - IS the industry supply
    - Price maker
  2. 2How might monopolist power be acquired?- Exclusive control over inputs
    - Patents (e.g. pharmaceuticals)
    - Govt licenses (e.g. taxi licensing)
    - Network economies
    - Natural monopolies (e.g. electricity lines network)
  3. 3How does a monopoly maximise its profits?By producing to the point where marginal revenue is equal to marginal cost: Q where MR = MC
  4. 4What happens if monopolies produce Q either above or below where MR = MC?Above: profit loss from producing too much and selling at a price too low
    Below: profit loss from producing too little and selling at a price too high
  5. 5Outline the social cost of monopoly powerB is lost consumer surplus, A is gained producer surplus, C is lost PS.
    DWL: B + C    Outline the social cost of monopoly power
  6. 6What is rent seeking? How do monopolies incentivise it?Spending money in socially unproductive ways to acquire, maintain, or exercise monopoly. Monopolies do this to maintain their powers. This is one of the big reasons societies tend to oppose monopolies.
  7. 7What is Schumpeter's argument for firms with market power, and to some extent, monopolies?Firms with supernormal profits drive innovation and entrepreneurship, because they have the resources to fuel large R&D departments.
    - Thus, they contribute meaningfully to society
  8. 8How did Schumpeter describe capitalism?"Creative destruction": the business cycle results in periodic waves of growth, innovation, and changing market power. The waves are increasing in frequency.
  9. 9What are some conventional policy responses that have been implemented in the past to counter monopolies?1. Break the monopoly up & deregulate the market to incentivise entry
    2. Tax monopoly profits
    3. Regulate market price of the good/service
  10. 10What legislation in NZ seeks to regulate/prevent monopoly powers?Commerce Act: prohibits anti-competitive acts, or 'restrictive trade practices':
    - Arrangements between competitors that significantly lessen competition in a market
  11. 11Describe how a price ceiling would effectively manage monopoly powersImplement a price ceiling that makes the 'profit-maximising decision' for the monopoly to be charging the price where MR = MC, thus incentivising entry by dissolving supernormal profits.
  12. 12Why is price regulation rarely done in real life?Regulators very rarely know the slope of a firm's cost curve, making it nearly impossible to implement a price ceiling that will effectively get the monopoly to reduce prices to where MR = MC.
  13. 13Describe a natural monopoly. When might they occur?A monopoly that can produce the entire market output individually cheaper than if there were several firms in the market. Might exist when economies of scale are declining
  14. 14Why are price ceilings not a viable solution for natural monopolies?The competitive price is often below AC curve. This means if this price was charged, the firm would make a loss, fall out of the market, and the entire market's supply would cease.
  15. 15Describe network effectsWhen the value of a product/service is increased by increasing users. Common examples of companies that benefit from network effects are social media companies.
  16. 16Why do digital monopolies offer different challenges to traditional monopolies?- They possibly make the consumer better off as a monopoly (network effects)
    - Barriers to entry remain low in the market despite monopoly
    - Despite this, they become particularly dominant due to high cost of change to other goods/services
  17. 17Describe a monopsony. What is their supply curve represented by?Only buyer in the market. Supply represented by the AE (average expenditure) curve
  18. 18In a monopsonist market, where does the ME (marginal expenditure) curve sit in relation to the AE curve?Above it, because average expenditure is rising with increasing Q.
  19. 19What is the price-optimising quantity for a monopsony?Where MV = ME
  20. 20What are the purchase/production rules of thumb for monopoly and monopsony?Monopoly: produce until MR = MC
    Monopsony: purchase until MV = ME
  21. 21Describe the social costs of monopsoniesB lost to reduced quantity, C is lost producer surplus, A is gained consumer surplus.
    - DWL: B + C    Describe the social costs of monopsonies
  22. 22Describe a bilateral monopoly. How do they behave?A market with only one seller/producer and one buyer. Always in a bargaining situation, which ultimately diminishes the respective monopoly and monopsony powers each party has. Market pushes closer to competitive than pure monopoly or monopsony situations.
  23. 23What is the basis of price discrimination?Firms charging separate prices to different consumers based on their personal willing to pay. This allows them to capture the maximum possible surplus
  24. 24Define reservation priceThe maximum price a customer is willing to pay for a good or service
  25. 25Describe consumer surplus and the surplus/profit that exists when first degree price discrimination occursEvery customer charged a unique price based on their reservation price. Impossible in practice. There is no consumer surplus, as it is all captured as producer surplus, and the entire area under the demand curve is profit
  26. 26Describe second degree price discriminationCharging different prices per unit for different quantities of the same good, e.g. bulk buying discounts
  27. 27Describe third degree price discriminationDividing consumers into two or more groups with separate demand curves, and charging different prices to each group
  28. 28What must you know about your consumers to be able to employ third degree price discrimination?1. Can identify different consumer segments
    2. Can identify different demand elasticities for each segment
    3. Can prevent arbitrage (resale)
  29. 29How will different prices be charged to different groups in 3rd degree price discrimination?Groups with more elastic demand curves will pay a lower price, while groups with inelastic demand curves will pay a higher price
  30. 30How does a firm figure out if it is worth employing third degree price discrimination?If the sum of profits from each consumer segment is greater than the regular market profit, it is worth it.
  31. 31Define intertemporal price discriminationSeparating consumers with different demand functions into different groups by charging different prices at different points in time. E.g., consumers who can't wait for long to buy the product are charged a higher price, later the price is reduced to appeal to mass market
  32. 32Define bundlingSelling two or more goods as a package - can get greater total revenue than if sold separately by charging higher than market price for one good.
  33. 33Why does bundling achieve a greater total revenue?Because demands are negatively correlated - the person willing to pay the highest for good A is willing to pay the least for good B, allowing good A to be valued higher than it would be if sold individually
  34. 34In the context of game theory, define optimal strategyA strategy that optimises the party's expected payoff, taking into account the actions of the other party
  35. 35Differentiate between a cooperative and non-cooperative gameCooperative: participants can negotiate binding contracts that allow joint strategies to be formulated
    Non-cooperative: such contracts cannot be formed.
  36. 36What is a dominant strategy?A strategy that is optimal for one party, regardless of what the other party does
  37. 37How does game theory play out if one party doesn't have a dominant strategy?The optimal strategy of the party without a dominant strategy is wholly dependent on the actions of the other party
  38. 38Differentiate between a dominant strategy and a nash equilibriumDominant strategy is independent of the action of the other party. Nash equilibrium is when the two parties are doing the best they can given the actions of the other party.
  39. 39What are maximin strategies in game theory?Strategies that consider the possibility of the other party being irrational: e.g. if Firm 1 can identify Firm 2's dominant strategy and acts accordingly, if Firm 2 doesn't follow its dominant strategy (despite it being dominant), Firm 1 could make large losses.
  40. 40How are decisions often made when considering Maximin Strategies?Probabilities are attached to the other party's actions, and the strategy that maximises expected payoff based on these probabilities is chosen.
  41. 41Describe the Prisoner's DilemmaA situation in which the Nash Equilibrium does not confer the best outcome for both parties.
    - Each party would be better off following a different strategy, but because of dominant strategies, the Nash results in wellbeing not being maximised
  42. 42Differentiate between pure and mixed strategies- Pure: player unconditional, defined choice by a player. Always 100% probability this choice will be made. Sometimes no Nash can be achieved.
    - Mixed: assignment of probability to all choices, random choice made based on these probabilities. Nash is always possible.
  43. 43Differentiate between single shot and repeated games. How do the strategies in each differ?- Single shot: parties decide on a strategy simultaneously, and choices have no future repercussions.
    - Repeated: actions and payoffs recur, and thus your previous strategy has future repercussions
    Thus, an optimal strategy for a single shot game may not be an optimal strategy for a repeated game
  44. 44What is a common strategy adopted in repeated games?Tit-for-tat strategy: when you respond identically to your competitor's previous actions. This essentially punishes defectors with your own defection, or rewards cooperators with your own cooperation.
  45. 45How do infinitely repeated games compare to those with a limited time scope?Infinitely repeated, or those with no clear conclusion in sight, benefit from cooperative tit-for-tat behaviour. Limited scope games contrarily often result in a Prisoner's Dilemma due to undercutting and defection, usually in the final stages of the game
  46. 46What 2 reasons result in tit-for-tat strategies often working in practice?1. Firms don't know how long they will be competing with their rivals, essentially making it an infinitely repeated game in practice
    2. Competitors may have some doubt of rationality, assuming blind tit-for-tat cooperation
  47. 47Describe a sequential gamePlayers move in turn, as opposed to simultaneously. This allows opportunity for analysis of each other's actions and reactions, forming strategies and moves based on this.
  48. 48What is the role of threats and credibility in sequential games?There is often a large incentive to be the first to make a move/act. To do this, the firm needs to convince its competitor it has no choice but to move first. Threats are not relevant unless they are credible.
  49. 49How can a threat be made credible in game theory & sequential games?By framing the ideal option that is being competed for as your dominant strategy. If the other party can identify what you have threatened to do isn't your dominant strategy, the threat isn't credible.
  50. 50Describe the role of reputation in game theoryReputation can have a strong impact on future decisions of competitors that can be advantageous. Thus, for long-term games, it can be advantageous to act irrationally early-on to set precedent and build a reputation.
  51. 51What kind of goods are sold on auction markets? What is the key advantage of an auction market?Differentiated products without an established market value. Advantageous due to huge savings on transaction cost, thus increasing the efficiency of the market
  52. 52What are some common auction formats?- English: seller actively solicits higher prices
    - Dutch: price starts high, and reduces until sold.
    - Sealed bid: all bids made simultaneously and without knowledge of other prospective buyer's bids.
  53. 53Differentiate between common and private value auctions- Common: value is equal to all bidders, but the precise value isn't known. Learning other bidder's estimates can affect your perceived value.
    - Private: each bidder knows their precise individual value (WTP). Learning other's values will not affect your value/WTP.
  54. 54How is the payoff of winning an auction defined?Difference between the buyer's reservation price (maximum WTP) and the price paid.
  55. 55What is the winner's curse in an auction, what kind of auctions does it occur in, and how can you avoid it?Occurs in common-value auctions. Occurs when the value of the good is overestimated, and the price paid is higher than the value. Avoidable by always bidding below your maximum estimated price.
  56. 56Define asymmetric informationWhen there is a discrepancy between information about a transaction possessed by the buyer and the seller.
    - E.g. used cars sell for less than new ones because there is asymmetric info - the seller knows much more about the quality of the car than the buyer.
  57. 57Describe how asymmetric information results in adverse selection in the marketIf information was perfectly symmetrical, high quality goods and low quality goods would exist in separate markets. Because asymmetry exists, they are sold on the same market. The resulting suspicion from buyers means high quality goods are underpriced (perceived as 'medium' quality), and sellers remove high quality from the market. Demand shifts in a way that results in low quality goods crowding the market
  58. 58Explain the respective impacts asymmetric information has on the demand curves for both low and high quality goods- High: demand curve shifts down/left as perceived quality by the consumer decreases
    - Low: demand curve shifts up/right as perceived quality moves closer to that of higher quality goods. Thus quantity increases, crowding the market
  59. 59Define adverse selectionWhen goods of differing quality are sold for a single price in the market due to asymmetric information. High quality goods are driven out of the market as a result.
  60. 60Describe how adverse selection affects the health insurance marketMore health conscious individuals that are aware of poor health seek insurance. Thus the pool of unhealthy individuals insured increases. The higher number of payouts results in premiums needing to increase, and insurance becomes more unaffordable.
  61. 61Describe pool risks as a means to counter adverse selection in the insurance marketIf insurance is provided to an entire population of a certain demographic, e.g. people over 65, the problem of adverse selection is eliminated.
  62. 62Describe the impact developing disease diagnosis technology could have on insuranceAdverse selection problem exacerbates. On the contrary, insurance companies may require all insurance seekers to take a test, and charge higher premiums to at-risk people, in essence discriminating against them.
  63. 63Why does asymmetrical information incentivise businesses to build a positive reputation or standardise?When buyers have little information, they often refer to brand/firm reputation to gauge quality. When reputation building isn't possible, standardising can help to overcome buyer skepticism.
  64. 64What is market signalling?Attempts from sellers to convey information about product quality. E.g. people obtain tertiary degrees to signal productivity in the job market, car dealers offer warranties to signal car reliability
  65. 65Why is it important to understand signal credibility?If signal credibility is poorly understood, unfair prices will undervalue high quality and overvalue low quality. E.g. productive workers will be pooled in a wage category that overpays unproductive workers, and underpays productive ones.
  66. 66How can sellers of durable goods signal product quality to consumers with asymmetric information?Guarantees and warranties - a signal that it is justified to pay a higher price for the product. Particularly effective signals in the absence of reputation.
  67. 67What is a moral hazard?When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event
  68. 68Provide examples of moral hazard in real life- Job shirking: decreased productivity by workers when they are unobserved by their boss.
    - Insurance: people become less risk averse when insured
  69. 69Describe the principal-agent problemWhen agents (e.g. firm executives) pursue their own goals rather than those of the principals (e.g. firm owners).
  70. 70What limitations prevent egregious cases of principal-agent problem in private enterprises?1. Stockholders hold the ability to complain loudly when managers behave improperly
    2. Unless managers pursue profit maximisation, a vigorous market for corporate control can develop
    3. There is a competitive market for profit maximising managers
  71. 71Summarise the efficiency wage theoryAt a market-clearing wage, the cost of losing a job is simply the cost of finding a new job at the same wage. By paying a higher wage rate, you are increasing the cost of job loss, and therefore increasing productivity in your firm by reducing the level of shirking
  72. 72Based on the principle of the efficiency wage theory, what is the efficiency wage?A wage high enough to act as an incentive to not shirk.
  73. 73How does the problem of unemployment affect the efficiency wage theory?If all firms pay above market clearing wages, the demand of labour will be less than supply, and unemployment arises. Workers fired for shirking therefore face not only lower wages but also the spells of unemployment
  74. 74How is unemployment in a shirking/efficiency wage theory found on a graph?Difference between L* (labour q at market clearing wage w*) and Le (labour q at efficiency wage we)How is unemployment in a shirking/efficiency wage theory found on a graph?
  75. 75What reality is behavioral economics based on?Neoclassical economic theory assumes people always behave rationally and have well-ordered preferences, which isn't always true, because optimization subject to some kind of constraint is a very complex task
  76. 76What is a reference point?The point of view from which someone makes a valuation or consumption decision. Heavily dependent on previous experience in the market.
  77. 77Describe the endowment effectA type of reference point: people value goods more when they have them compared to when they don't, i.e. discrepancy between WTA and WTP. Very closely tied to loss aversion
  78. 78How does neoclassical vs. asymmetric value portray the perceived value of a gain or loss of $100?Neoclassical dictates they offer equal and opposite value gains/losses, but the more modern asymmetric value model shows people consider a loss to be much more significant than a gain, even if the monetary value is identical.
  79. 79Describe framingOver-reliance on the context in which a choice is displayed when making consumption decisions, e.g. people prefer 90% fat-free product to a 10% fat product.
  80. 80Describe salienceThe perceived importance of a good or service, typically manifesting as an emphasis on one key feature of a product. E.g. people who buy Volvos are safety concerned, and perceive this feature as more important than others.
  81. 81How may fairness affect the neoclassical demand supply model? What is unique about this?When demand increases due to exogenous demand shocks, new demand curves might be much shorter with huge variations in elasticities, as people perceive paying above a certain price as unfair and gouging.
    - This means some people who were willing to pay $X prior to the demand increase now no longer are.
  82. 82Describe anchoringWhen decisions are complex, we rely on basic rules-of-thumb to make valuations that introduce biases into our decision making. Anchoring is an over-reliance on one prior piece of information, e.g. overemphasis on the first numbers of $29.99, thus we include this in our '$20-30 bracket'.
  83. 83Should rules-of-thumb, such as those used in anchoring, be outright dismissed?No - the time and effort they save in making what otherwise would be extremely complex decisions often outweigh the potential 'efficiency' lost.
  84. 84Behavioral economics would define people as ____, rather than ____Satisfiers, rather than optimisers.
  85. 85What is the law of small numbers?People tend to overstate the probability of an event happening when they have little memory/reference to draw upon.
    - Subjective probabilities tend to be very different to objective probabilities.
  86. 86Why are bubbles such as the dotcom and housing bubbles of interest in behavioral economics?They are the product of irrational behavior and information cascades (assessing investment decisions based on the actions of others).
  87. 87How can behavioral economics influence policy-making decisions regarding negative externalities?Rather than implementing potentially inefficient taxes, seek to rather increase how informed the consumer is on the topic, allowing them to make rational decisions that decrease marginal external costs.
  88. 88Define an externalityAn action by either a producer or consumer that affects other producers or consumers, but isn't accounted for in the market price. Can either be negative (imposes costs) or positive (imposes benefits)
  89. 89Define marginal external cost and marginal social costMEC: the increase in imposed external cost as a firm increases output by one unit.
    MSC: the sum of the marginal cost of production and the marginal external cost.
  90. 90What role can behavioural economics play in reducing externalitiesUsing moral persuasion to better inform consumers so they change their behaviour to reduce the externality, as opposed to implementing a Pigovian tax.
  91. 91How are property rights relevant to externalities?Dependent on who owns the property right for a resource that is being affected the externality, the firm may be required to internalize the cost.
  92. 92Under what circumstances can bargaining be used to achieve economic efficiency in the face of an externality? What bargaining outcome is the most efficient?When there are relatively few parties involved, and property rights are well-specified. The most efficient outcome is the one with the greatest profit
  93. 93What is the Coase theorem? When does it not hold true?When parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified.
    - Fails when there are many parties, transaction costs are high, or behaviour is excessively strategic
  94. 94n

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Flashcards on ECON201 Viktoria, created by Guy Turner on 19/05/2020.
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