Microeconomics Welch Exam 2

Sole Proprietorship (72% of U.S firms, 4% all Business receipts)

Partnership (9% total US firms, 13% all business receipts)

Corporation (18% total US firms, 82% all business receipts)

Cooperation (1% total US firms, 1% all business receipts)

- one owner, runs everything.
- Simple start up.
- Has unlimited-liability (if you go bankrupt, you can pay off your debts from the assets of the business)

- two or more people operating as partners.
- Has unlimited-liability. (if you go bankrupt, you can pay off your debts from the assets of the business)

- needs a charter to start / stockholders' liabilities are limited to the value of their stock ownership.
- Has limited-liability. Make the most amount of money. (sells stock) needs a charter to start / stockholders' liabilities are limited to the value of their stock ownership.

- like a corporation, but each investor only owns one share / org that pools its resources together to buy/sell more efficiently.
- Has limited liability
- (sell stock but shareholders have 1 vote)

debt worth as much as assets

You're liable to pay off all your debts regardless of the worth of your assets. Need to keep paying the debt until it is done for. And if you can't pay it off, they can take anything in order to pay off the debt.

Pure (perfect) Competition
Monopolistic Competition (MC)
Pure Monopoly (PM)
Oligopoly (O)

Price (P) x Quantity (Q)

Fixed Cost (FC) + Variable Cost (VC)

change in total revenue (TR) / change in quantity (Q)

change in total cost (TC) / change in quantity (Q)

variable cost (VC) / quantity (Q)

Total Cost (TC) / Quantity (Q)

Constant, normal profit (break even)

Expanding, Economic Profit (above break-even)

Declining, Economic Loss (below break-even)

MR=MC

Pure Competition
- Price: Low
- Quantity: High

Monopolistic Competition
- Price: Medium
- Quantity: Medium

Pure Monopoly
- Price: High
- Quantity: Low

Oligopoly
- Price: Medium
- Quantity: Medium

Pure Competition
- None

Monopolistic Competition
- Some

Pure Monopoly
- Absolute

Oligopoly
- Some

Pure Competition
- Is the most efficient model

Monopolistic Competition
- Is an inefficient model

Pure Monopoly
- Is an efficient model

Oligopoly
- Is an inefficient model

Short-Run Operation:
- can be economic (above normal), Normal, or below normal(loss); depending on where the market price and cost levels are relative to each other (true for any industry; anything can happen to any industry in the short run)

Long-Run Operation:
- Profits are normal (good years and bad years cancel each other out)

Short-Run Operation:
- can be economic (above normal), Normal, or below normal(loss); depending on where the market price and cost levels are relative to each other (true for any industry; anything can happen to any industry in the short run)

Long-Run Operation:
- most changes occur on supply side, not many changes in demand. Normal (economic if firm has a superior location)

Short-Run Operation:
- can be economic (above normal), Normal, or below normal(loss); depending on where the market price and cost levels are relative to each other (true for any industry; anything can happen to any industry in the short run)

Long-Run Operation:
- Economic (as long as other firms can be kept out of the industry)

Short-Run Operation:
- can be economic (above normal), Normal, or below normal(loss); depending on where the market price and cost levels are relative to each other (true for any industry; anything can happen to any industry in the short run)

Long-Run Operation:
- Economic (difficult for new firms to enter and compete away markets / profits)

Monopolistic Competition;
- Advertise

Monopoly;
- Research and Develop

Oligopoly;
- Research and Develop
- Advertise

Price Discrimination: Pure Monopoly

Collusion: Oligopoly

Similar:
- All cost curves are U shaped
- All want to produce at MC=MR
- Fixed costs can change in the short run
- In the short run, profits can be economic, normal or loss

Different:
-Demand is different in all 4 industries
- This leads to different output levels
- For firms Monopolistic Competition and Oligopoly are between the price and output of - Pure Competition and Pure Monopoly
- P is lowest for PC, highest for PR - unregulated
- Q is highest for PC, lowest for PM - unregulated

Concentrated:
industry dominated by a few large firms that shape its direction and evolution.

Add up 4 to 8 of the largest market shares.
- Higher ratio: More concentrated industry
- Lower ratio: more competitive industry
- Around 70% is the "magic" number for too concentrated

Sum of the SQUARES of the market shares of ALL firms in an industry
- "magic number" = 2,200; above this is not allowed
- All add up to 100% of market, 100%^2 is 10,000
Range 0-10,000
- Herfindahl Index is used more than the Concentration Ratio by the FDC and Dept of Justice

- Horizontal Mergers (1895-1905)
- Vertical Mergers (1916-1929)
- Conglomerate Mergers (1957-1967)
- All of the above types of mergers (1978-1990)

Firms in the SAME industry merge
- A merger in which one firm combines with another that produces the same type of product
- Recently: Exxon-Mobile, Compaq-HP

- Firms in RELATED industries merge (one often fits into the production process of the other).

- A merger in which one firm combines with another from which it had purchased inputs or to which it had sold output

- Recently: Paypal - Ebay

- Firms in DIFFERENT industries merge

- A merger of firms in different and unrelated industries

- Recently: RJ Reynolds - Nabisco
- These mergers don't tend to work out

- Sherman Act (1890)
- Clayton Act
- Federal Trade Commission Act (FTC)

Prohibits: Collusion through 3C's
- Contracts
- Combinations
- Conspiracies in restraint of trade
Prohibits
- Monopolies
- Monopolization
- Prohibited Trusts
- Restraint of Trade

Does NOT prohibit:
- Monopolistic Comp.
- Oligopolies

- Price discrimination that could lead to the creation of a monopoly.

Prohibits:
- certain anticompetitive practices including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor

- Tying agreements (tying sale of one product to the sale of another one)

- Interlocking Directories (anybody can sit on any # of board of directors unless the company are in competition)

Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers