question
What are the legal types of businesses in our economy?
answer
Sole Proprietorship: one owner, runs everything. Simple start up.
Partnership: two or more people operating as partners.
Corporation: needs a charter to start / stockholders' liabilities are limited to the value of their stock ownership.
Cooperative: like a corporation, but each investor only owns one share / org that pools its resources together to buy/sell more efficiently.
Partnership: two or more people operating as partners.
Corporation: needs a charter to start / stockholders' liabilities are limited to the value of their stock ownership.
Cooperative: like a corporation, but each investor only owns one share / org that pools its resources together to buy/sell more efficiently.
question
Which legal types of businesses are the most influential in terms of revenues?
answer
The sole proprietorship is the most important as far as total number of firms, but corporation is the most important when it comes to total sales.
question
What are the 4 industry models used to analyze American Industry?
answer
Pure Competition(PC): the most basic market structure.
Monopolistic Competition(MC): a market structure in which many producers offer products that are substitutes but are not viewed as identical by consumers.
Pure Monopoly(PM): sole supplier o a product with no close substitutes.
Oligopoly(O):(non-collusive) market structure dominated by just a few firms that each behaves independently.
Monopolistic Competition(MC): a market structure in which many producers offer products that are substitutes but are not viewed as identical by consumers.
Pure Monopoly(PM): sole supplier o a product with no close substitutes.
Oligopoly(O):(non-collusive) market structure dominated by just a few firms that each behaves independently.
question
What kinds of business make up each industry model?
answer
PC: Agriculture & Manufacturing
MC: All small businesses, Restaurants, dry cleaners, Barbers, Hardware shops, flower shops, Professional Offices.
PM: (regulated) Utility Companies (Unregulated) Debeers, Time Warner, Microsoft, IBM, City Newspapers, Ticketmaster.
O: (Big Businesses) Airlines, Automobile, Steel, Beer, Cereal, Internet providers, Big retailers(Wal-mart).
MC: All small businesses, Restaurants, dry cleaners, Barbers, Hardware shops, flower shops, Professional Offices.
PM: (regulated) Utility Companies (Unregulated) Debeers, Time Warner, Microsoft, IBM, City Newspapers, Ticketmaster.
O: (Big Businesses) Airlines, Automobile, Steel, Beer, Cereal, Internet providers, Big retailers(Wal-mart).
question
Number of firms in PC?
answer
100000+ nationwide(Largest)
question
Number of firms in MC?
answer
1000s nationwide / 100s citywide)
question
Number of firms in PM?
answer
1 with atleast 90% of the market
question
Number of firms in O?
answer
A few (<20 nationwide), "The Big 3 or Big 6"
question
Types of products sold in PC?
answer
Standardized
question
Types of products sold in MC?
answer
Different
question
Types of products sold in PM?
answer
Unique
question
Types of products sold in O?
answer
Standardized(steel) and different(automobile)
question
Control over price PC?
answer
None(Price taker)
question
Control over price MC?
answer
Some within limits(couldn't double prices, but can fool around with them)
question
Control over price PM?
answer
Absolute if unregulated (price maker) OR limited if regulated
question
Control over price O?
answer
Limited by mutual interdependence OR considerable with collusion(Before making price changes, each firm must consider the reactions of its rivals).
question
Conditions of entry for new firms in PC?
answer
Easy
question
Conditions of entry for new firms in MC?
answer
Easy come & easy go(to continue earning economic profits LR, by the monopolistic firm).
question
Conditions of entry for new firms in PM?
answer
Blocked
question
Conditions of entry for new firms in O?
answer
Large amount of capital needed
question
Non-Price competition used (advertising / R&D) for PC?
answer
Little to none
question
Non-Price competition used (advertising / R&D) for MC?
answer
Lost of advertising
question
Non-Price competition used (advertising / R&D) for PM?
answer
Some PR advertising and R & D
question
Non-Price competition used (advertising / R&D) for O?
answer
Lots of advertising and other gimmicks(extras / add-ins / marketable name)
question
What is the Computation for Total Revenue(TR)?
answer
Price(P) x Quantity(Q)
question
What is the Computation for Total Cost(TC)?
answer
Fixed Cost(FC) + Variable Costs (VC)
question
What is the Computation for Marginal Revenue(MR)
answer
TR / Q
question
What is the Computation for Marginal Cost(MC)
answer
TC / Q
question
What is the Computation for Avg Variable Cost(AVC)
answer
VC / Q
question
What is the Computation for Avg Total Cost(ATC)
answer
TC / Q
question
At what point (output level) do the firms in each industry maximize their profits?
answer
MR = MC
question
What kind of output levels/prices exist in PC?
answer
P: Low
Q: High
Q: High
question
What kind of output levels/prices exist in MC?
answer
P: High
Q: Low(Sometimes restricted to increase profits)
Q: Low(Sometimes restricted to increase profits)
question
What kind of output levels/prices exist in PM?
answer
P: Medium
Q: Medium
Q: Medium
question
What kind of output levels/prices exist in O?
answer
P: Medium
Q: Medium
Q: Medium
question
Control over price for PC?
answer
None
question
Control over price for MC?
answer
Absolute(unregulated) / Limited (regulated)
question
Control over price for PM?
answer
some within limits
question
Control over price for O?
answer
Limited with mutual interdependence OR considerable with collusion
question
How efficient is PC?
answer
Most efficient model
question
How efficient is MC?
answer
Inefficient
question
How efficient is PM?
answer
Efficient
question
How efficient is O?
answer
Inefficient
question
Profits for PC?
answer
SR: 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)
LR: Profits are normal(good years and bad years cancel each other out)
LR: Profits are normal(good years and bad years cancel each other out)
question
Profits for MC?
answer
SR: anything can happen
LR: most changes occur on supply side, not many changes in demand. Normal (economic if firm has a superior location)
LR: most changes occur on supply side, not many changes in demand. Normal (economic if firm has a superior location)
question
Profits for PM?
answer
SR: can be economic, normal, or losses
LR: economic(as long as other firms can be kept out of the industry)
LR: economic(as long as other firms can be kept out of the industry)
question
Profits for O?
answer
SR: Anything is possible
LR: Economic(difficult for new firms to enter and compete away markets / profits)
LR: Economic(difficult for new firms to enter and compete away markets / profits)
question
Which industries use a lot of(or little) advertising?
answer
MC, O, (PM might PR ads)
question
Which industries spend on research and development?
answer
PM and O
question
Which firm is most likely to get involved with price discrimination?
answer
PM
question
Which firm is most likely to get involved with Collusion?
answer
O
question
What is similar among the 4 industry models?
answer
Costs(computations are the same, & the AVC, ATC, & MC curves represent them are all U shaped
Firms in all 4 industries attempt to produce at output levels where profits (TR - TC) are max, and MR = MC
In SR, profits can be economic, normal, or losses for firms in all 4 industries
In LR, 2 earn normal profits (PC & MC) and 2 earn economic profits (O & PM - unregulated)
Firms in all 4 industries attempt to produce at output levels where profits (TR - TC) are max, and MR = MC
In SR, profits can be economic, normal, or losses for firms in all 4 industries
In LR, 2 earn normal profits (PC & MC) and 2 earn economic profits (O & PM - unregulated)
question
Differences among the 4 industries?
answer
Demand for product / service is different in all 4 industries:
perfectly elastic for PC
inelas. for PM
semi - elas. for MC
kinked for O
This leads to different prices & output levels
- P is lowest for PC, highest for PR -- unregulated
- Q is highest for PC, lowest for PM -- unregulated
For firms in O & MC industries, P & Q are in between PC & MC
perfectly elastic for PC
inelas. for PM
semi - elas. for MC
kinked for O
This leads to different prices & output levels
- P is lowest for PC, highest for PR -- unregulated
- Q is highest for PC, lowest for PM -- unregulated
For firms in O & MC industries, P & Q are in between PC & MC
question
In general, did the U.S become more competitive or more concentrated from 1900-1990?
answer
Competitive Industries
- PC & MC
• Operate more efficiently
• Little control on Price
• Many small firms in sector
Concentrated Industries
- O & PM
• Operate less efficiently
• Lots of control on Price
• A few large firms in sector
- PC & MC
• Operate more efficiently
• Little control on Price
• Many small firms in sector
Concentrated Industries
- O & PM
• Operate less efficiently
• Lots of control on Price
• A few large firms in sector
question
How is industry concentration measured numerically by Concentration Ratios?
answer
sum of the market shares of the 4 or 8 largest firms in an industry
- Higher ratio: More concentrated industry
- Lower ratio: more competitive industry
Around 70% is the "magic" number for too concentrated
- Higher ratio: More concentrated industry
- Lower ratio: more competitive industry
Around 70% is the "magic" number for too concentrated
question
How is industry concentration measured numerically by Herfindahl Index?
answer
sum of the SQUARES of the market shares of ALL firms in the 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
- "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
question
Horizontal Mergers
answer
Firms in the SAME industry merge
Recently: Exxon-Mobile, Compaq-HP
Recently: Exxon-Mobile, Compaq-HP
question
Vertical Mergers
answer
Firms in RELATED industries merge( one often fits into the production process of the other).
Recently: Paypal - Ebay
Recently: Paypal - Ebay
question
Conglomerate Mergers
answer
Firms in DIFFERENT industries merge
Recently: RJ Reynolds - Nabisco
-These mergers don't tend to work out
Recently: RJ Reynolds - Nabisco
-These mergers don't tend to work out
question
What major Antitrust laws exist to help protect consumers against potential abuses of firms in concentrated industries
answer
Sherman Act
- Prohibits: Collusion through 3C's
-- Contracts
-- Combinations
-- Conspiracies in restraint of trade
Clayton Act
- Prohibits: Price Discrimination
Also:
- 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)
Federal Trade Commission Act
- Established a federal agency to enforce antitrust laws.
- Prohibits: Collusion through 3C's
-- Contracts
-- Combinations
-- Conspiracies in restraint of trade
Clayton Act
- Prohibits: Price Discrimination
Also:
- 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)
Federal Trade Commission Act
- Established a federal agency to enforce antitrust laws.
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