1. Identify the 5 characteristics of perfect competition. 1. Numerous buyers and sellers 2. Standardized/identical product 3. Freedom to enter and

Size: px
Start display at page:

Download "1. Identify the 5 characteristics of perfect competition. 1. Numerous buyers and sellers 2. Standardized/identical product 3. Freedom to enter and"

Transcription

1

2

3 1. Identify the 5 characteristics of perfect competition. 1. Numerous buyers and sellers 2. Standardized/identical product 3. Freedom to enter and exit the market 4. Producers have no control over prices (price taker) 5. Easy access to information about products and prices

4 2. Identify the 4 characteristics of monopolies. 1. One producer 2. Unique product 3. High barriers to entry 4. Substantial control over price (price maker)

5 3. Define natural monopoly. Occurs when the costs of production are lowest with only one producer (think public utilities) Example: utility companies (electric and gas)

6 4. Define technological monopoly. Occurs when a firm controls a manufacturing method, an invention, or a type of technology

7 5. Identify the 4 characteristics of monopolistic competition. 1. Many producers/sellers 2. Differentiated (similar) products 3. Few barriers to entry 4. Some control over prices (Use nonprice competition to set their goods apart from other businesses)

8 6. Explain what nonprice competition is and give an example. Anything other than lowering price such as advertising or giveaways Example: Buying a car and receiving 3 free oil changes (Or free Sirius XM radio for 6 months)

9 7. Name the 2 types of products an oligopolist is likely to sell. Standard AND differentiated products (Steel or cars and cell phones)

10 8. Identify the 3 characteristics of oligopolies. Few sellers and many buyers Standardized or differentiated products High barriers to entry

11 9. Explain how the cereal industry fits the definition of an oligopoly. There are only a few manufactures of cereal such as Kellogg's and General Mills There are different brands of cereal (Cheerios, Frosted Flakes, Captain Crunch; differentiated products) It would be difficult for firms to enter because these two companies hold a large market share

12 10. A cartel: An organization of producers that set production and price levels for a product Example: OPEC

13 11. Explain the purpose of antitrust legislation. To breakup companies (monopolies) that have become too large

14 12. Define merger. When two firms join together to become one large firm Why would the FTC and Department of Justice deny a possible merger? If the merger would restrain trade or of the companies would have too large of a market share and control over price

15 13. You want to start your own smoothie store located in a nearby mall. This is an industry where monopolistic competition exists. Explain in detail how you would make your business a success according to the following factors: product differentiation, nonprice competition, and prices. Discuss what sets your product apart from your competitors (all natural ingredients; fresh fruit, etc.); discuss use of advertising or incentives like punch cards or rewards via an app; price: similar to the competition but may be higher or lower (explain why)

16 5-2 Review: Costs of Production

17 14. Variable costs: costs that vary based on the level of production output (ex: wages)

18 15. Fixed costs: costs the business owner incurs no matter how much they produce (Ex: mortgage/rent, utilities, insurance)

19 16. Total Revenue= income a business receives from selling its products TR= P x Q

20 17. Business should hire workers where: MC=MR

21 18. What is the price of the good being sold? Number of Workers Marginal Cost Marginal Revenue 1 $0 $30 2 $10 $30 3 $20 $30 4 $30 $30 $30

22 19. What does marginal cost represent? Number of Workers Marginal Cost Marginal Revenue 1 $0 $30 2 $10 $30 3 $20 $30 4 $30 $30 The additional cost of producing one more unit

23 20. How many workers should this firm hire? Why? Number of Workers Marginal Cost Marginal Revenue 1 $0 $30 2 $10 $30 3 $20 $30 4 $30 $30 4 workers (where MC=MR)

24 21. What is the marginal product of the third worker? Number of Workers Total Product Marginal Product

25 22. Identify increasing returns on the chart. Number of Workers Total Product Marginal Product Increasing returns

26 23. Identify diminishing returns on the chart. Number of Workers Total Product Marginal Product Diminishing returns

27 No, that worker provides a negative marginal product 24. Would the firm hire the fifth worker? Explain. Number of Workers Total Product Marginal Product

28

29 25. Advantages of a sole proprietorship: Easy to start-up Few restrictions Full decision-making power Keeps all profits Individual taxation

30 25. Disadvantages of a sole proprietorship: Unlimited liability Limited growth potential Limited life Less access to capital

31 25. Advantages of partnerships: Easy to form; may be formed by an oral agreement Few restrictions May be limited liability depending on the type (LLP) Individual taxation Specialization of partners

32 25. Disadvantages of partnerships: Sharing profits Conflict over decision making May have unlimited liability depending on the type (general partnership) Limited life

33 27. Define limited partnership. One general partner and one or more limited partners Limited partners contribute financial capital but leave day-to-day business operations to the general partners Can only lose the amount invested

34 28. Define limited liability partnership. Operates like general partners while enjoying the protection of limited liability Well suited to businesses in which all partners want to take an active role in managing the business

35 29. Advantages of corporations: Limited liability Growth potential Professional management Unlimited life

36 29. Disadvantages of corporations: Complex to start-up (lots of paperwork) Loss of control to board of directors Government regulation Double taxation

37 30. Why do corporations experience double taxation? Taxed once at the corporate level and dividends are also taxed A corporation is treated as a legal entity or person

38 31. Advantages of franchises: Have a record of profitability and a built-in customer base Enables a parent company to expand rapidly Reputation and expectations of the quality of the good exist

39 31. Disadvantages of franchises: Franchisers charge high fees for the right to use their name Franchisees must also pay royalties to the parent company Franchisees must follow strict rules and procedures

40 32. Define cooperative. A business that is owned and operated by a group of individuals for their shared benefit

41 33. Define nonprofit. Functions like a business, except that it does not operate to make a profit May support a particular cause or issue

42

43 1. Sell a standardized product only. Perfect competition 2. Sellers offer similar products for sale. Monopolistic competition 3. Sell standard or differentiated products. Oligopoly 4. Many sellers and many buyers. Perfect competition or monopolistic competition 5. Price taker. Perfect competition

44 6. Large barriers to enter this type of market. Monopoly (and oligopoly) 7. High start-up costs prevent entry of new firms. Oligopoly (and monopoly) 8. One key characteristic is nonprice competition. Monopolistic competition 9. Price maker. Monopoly 10. Few firms hold a large market share. Oligopoly

45

46 1. Owned by one person. Sole proprietorship 2. Limited life. Sole proprietorship and partnership 3. Joint decision-making. Partnership 4. Sells stock. Corporation 5. Access to resources (such as capital). Partnership or corporation

47 6. May be public or private. Corporation 7. Easy to open and close. Sole proprietorship and partnership 8. Unlimited liability. Sole proprietorship and general partnership 9. Limited liability. Corporation (or LLP) 10. Stockholders may receive dividends. Corporation