hi everybody jiger breed here from review eon.com today we're going to be looking at unit four for microeconomics this unit is all about imperfect competition this video goes alongside the total review booklet from reviewe eon.com if you're interested in supporting this channel pick it up in the links below and then like and subscribe let's get into the content off there are three types of imperfect markets the first one is Monopoly that's where one business dominates an entire industry the second one is oligopoly where a few businesses dominate a market the third one is monopolistic competition it's similar to perfect competition but here products are different but we have lots and lots of sellers selling similar products one of the key aspects of imperfectly competitive markets is that firms must lower prices in order to sell more output we see that in this chart here as the firm produces only one unit of output they can sell it for a high price of $10 that gives us a total revenue of $10 and a marginal revenue of $10 but if they want to sell more units of output they have to lower the price lowering the price down to $9 they get to sell one more unit but their total revenue increases by only $8 that means the marginal revenue is lower than the demand those first two columns are the demand curve but the quantity with the marginal revenue is the marginal Revenue curve and that marginal revenue curve is below the demand as a result of having to lower prices as they produce more output here's what it looks like on the graph on the graph the marginal revenue curve is below the demand we have a downward sloping demand average revenue in price and the marginal revenue curve Falls below that's how you'll graph it when you sketch it out now as you've learned before that marginal revenue curve gives us an indication of the elasticity of the demand curve above where the marginal revenue is positive that's the elastic range of this demand curve where that marginal revenue curve intersects the axis marginal revenue is zero there that's the unit elastic point on that demand curve above once the marginal revenue drops below the axis and now it marginal revenue is negative that is the inelastic region on that demand curve if we add a marginal cost curve to this graph we can find the profit maximizing quantity as you should already know all firms profit maximize where the marginal revenue equals the marginal cost there is our profit maximizing quantity now this firm doesn't have to put a price at Mr equal MC the demand curve shows consumer willingness to pay that means we're going to get the price all the way up at that demand curve above for imperfectly competitive firms they price above marginal cost that means that these firms are not allocatively efficient and there will be dead weight loss in imperfectly competitive markets there's your dead weight loss right there next we're going to focus specifically on monopolies there's one seller in a monopoly High barriers to entry make it impossible for others to enter the market this firm produces a unique good without any close substitutes these firms are price Seekers that means they don't have to get the price from the market they are driven by the demand curve they have and they will price as much as they can for the quantity they produce the we saw earlier is the Monopoly graph here we have our marginal cost demand and marginal revenue this firm is going to produce where Mr equals MC that is our profit maximizing quantity they will price all the way up to demand because that demand curve is the maximum people are willing to pay for that quantity now we can add in our average total cost curve the location of that average total cost curve tells us whether or not this firm is making an economic profit in this case at the profit Maxim izing quantity of qf the average total cost curve is less than the demand that means this firm is earning an economic profit that economic profit is that box right there you could calculate the area of it if there were numbers since barriers to entry for a monopoly are incredibly high this firm can actually earn economic profits in the long run they're stuck here nobody can compete away their profits if this firm is earning zero economic profit or breaking even that average total cost Curve will be tangent to the demand curve at the profit maximizing quantity here the average total cost equals the price that's zero economic profit if that average total cost curve is a little bit higher now this firm is earning economic losses because that average total cost curve is greater than the price that means economic loss and we can find that economic loss at the quantity we're producing with that box right there calculate the area of it and that would give you the amount of economic loss make sure you know how to draw all three of these graphs Monopoly earning a profit breaking even and economic loss they're likely to show up on your exam one question you could often see about a monopoly is does a monopoly capture economies of scale as you should remember economies of scale means that you are producing in the downward sloping portion of the long run average total cost curve for a monopoly since their average total cost curve is downward sloping at the quantity they're producing this firm captures economies of scale it is important to note that this firm is not productively efficient though because they are not producing at the minimum of the average total cost that would be the quantity Where the marginal cost intersects the average total cost monopolies are not productively efficient next thing we're going to do is compare a monopoly to a perfectly competitive market let's draw out a perfectly competitive market we've got our downward sloping demand curve and upward sloping supply curve don't forget that the supply curve for a firm is the marginal cost curve above the minimum of the average variable cost so let's remember that the supply is equal to the marginal cost and our downward sloping demand curve is also going to be our average revenue and price we have a marginal revenue curve below the demand and now we can find the profit maximizing quantity Where Mr equals MC that is a lower quantity than we had at equilibrium then we price all the way up to demand that gives us a higher price than we had at the market equilibrium so we have higher prices and lower quantities then we would have in a perfectly competitive market thanks to this Monopoly just like you had in graphs you learned about in your last unit you can find all kinds of areas on this graph how do you find total revenue well you go up till you hit that demand curve that's your average revenue curve don't forget and then head over to the price that box there is your total revenue you can find your total cost by going all the way up to that average total cost curve there and that yellow box is your total cost some important quantities that show up on the exam are first socially optimal quantities also called allocatively efficient that's where price equals marginal cost and you find that at the intersection of the marginal cost and the demand curve next you could get questions about the productively efficient quantity as I've mentioned already that is the minimum of the average total cost I've also seen a few questions asking about Revenue maximizing now that's not what firms should be generally doing they usually want to profit maximize but revenue maximization is found found where the marginal revenue curve intersects the axis that's where marginal revenue is zero and total revenue is at its maximum there is a special type of Monopoly you could see questions about and that's a natural monopoly a natural monopoly always captures economies of scale public utilities are an example of a natural monopoly the most expensive part about providing your house with electricity is putting all the wires around town the next unit of electricity is generally cheaper than the previous unit that means the average total cost curve for a public utility tends to be constantly downward sloping here is one way to draw a natural monopoly there are others as well but you should be familiar with it and be prepared to draw it just in case some monopolies are able to price discriminate if they can determine the customers's willingness to pay in order to price discriminate they need to figure out which customers are willing to pay high prices and which ones demand lower prices the demand curve tells us that some units can be sold at higher prices now PF is what a single price Monopoly would charge for this product but those first few units could be sold for more over there at P1 if the firm can identify those people and charge them P1 they will be making more profit the next group the next few units there P2 is the maximum price those units can be sold for keep on going and we can actually charge different amounts for different units of output what that does is turns this firm's consumer surplus into profit if this firm can perfectly price discriminate it looks like this on the graph the marginal revenue merges back with the demand this firm produces the Mr equals MC Profit maximizing quantity now and that is the allocatively efficient quantity because the price of the last unit produced equals marginal cost so qf right there is our allocatively efficient quantity since this firm has perfectly price discriminated it has turned all of the consumer surplus into economic profit and since they're allocatively efficient there's no more dead weight loss as a result of perfect price discrimination now we're moving on to monopolistic competition monopolistically competitive markets have many many sellers the barriers to entry are quite low so firms can enter and exit the market products are differentiated that means they are similar and substitutable but different the last thing is that these firms can have some influence on price through product differentiation and advertising on the graph the monopolistically competitive firm looks identical to a monopoly so make sure you know how to draw a monopoly graph and you will automatically know how to draw a monopolistically competitive graph this firm is producing where the Mr equals MC quantity they price up to demand just like a monopoly this firm is not allocatively efficient because the price is is greater than marginal cost they are also not productively efficient because they are not producing at the minimum of the average total cost this firm has excess capacity that's what we call it in regards to monopolistically competitive markets and this is actually what it will look like for a monopolistically competitive firm in the long run the price is equal to the average total cost and this firm is breaking even in the long run this is what it's going to look like so make sure you know how to draw this graph this is a monopolistically competitive firm in Long Run equilibrium now this firm is earning economic profits in the short run in the long run though firms are going to enter the market and that will mean each firm left will have a smaller piece of the market since it's a smaller Market size that demand curve and marginal revenue curve are going to shift to the left they shift to the left until there is no more economic profit and we are back at long run equilibrium this firm on the other hand is earning economic losses but that's only in the short run because in the long run firms are going to exit the market trying to get away from those economic losses that will shift the marginal revenue curve and the demand to the right this time causing the firm to break even again in the long run the last Market structure we're going to learn about is really my favorite it's called oligopoly qualities of an oligopoly is we have a few sellers dominating the market usually less than 10 barriers to entry are still quite High and the goods could be different or homogeneous doesn't really matter the last quality is that they do have the ability to impact price through strategic Behavior game theory is how we best understand oligopoly Behavior game theory is a method for understanding interdependent strategic Behavior between entities in this case businesses you could see a payoff Matrix we have a payoff Matrix that shows a variety of outcomes that are possible between these two firms firms Sharon's Snips and twan's trims here are the strategies the strategies are the different choices these firms could make Sharon Snips is deciding whether to advertise or not to advertise whereas Twan stms is trying to decide whether to lower the price or maintain the price those are the strategies those are the optional choices that the firms have next you have the payoffs the payoffs are the values within the tables the first numbers are the amounts of profit that Twan trims could earn earn and the second numbers are the amount of profit that Sharon Snips could earn that leads us to four possible outcomes the four quadrants we have on this payoff Matrix are the different outcomes we could have in that upper quadrant right there we have advertising for Sharon Snips and lowering price for twan's trims this next quadrant we have Sharon don't advertise Antoine is going to lower price the first one in the lower left down there we have twan's trims maintaining price and Sharon Snips advertising and then our last one Sharon's not going to advertise there but Twan trims is going to maintain price so those are the four possible outcomes on this payoff Matrix so the first type of question you could get on this kind of payoff Matrix is about collusion collusion is the best outcome for both players generally the way I usually find that is I just add up the profit and it's the highest combined profit between the two firms for this case it's that lower corner right there where Twan trims is maintaining price and Sharon Snips is advertising that's the collusion outcome you just look at the Matrix and decide where would they want to go if they could sit down together and talk it out in order to figure out what's likely to happen we're going to solve this payoff Matrix the first step is to pick a brain we're going to start off with twan's Trims and Tuan is not just deciding what's best and doing that Tuan needs to think about what Sharon might do if Tuan thinks that Sharon might advertise then twan's trims is choosing between $1,300 profit and $1,600 profit one of those is clearly better more profit so $1,600 we're going to put a little star right there that is Twan trim's best action if Sharon advertises if Sharon doesn't advertise then Twan trim is deciding between $1,100 profit and $1,200 profit $1,200 is clearly better so I'm putting another star there what this tells us is that Twan trim's best move is a dominant strategy a dominant strategy is an action that will be taken by a player without regard to the actions of the other player since Tuan will maintain price regardless of what Sharon Snips does Twan stms has a dominant strategy of maintaining price next we're going to switch brains we're going to be Sharon's Snips next and when Sharon is the deciding what to do she has to consider the possibility that Tans lowers price if he does that then Sharon is deciding between $900 profit and $700 profit in that case advertising is the best bet because advertising brings in $200 more than not advertising if on the other hand twan's trims maintains price then Sharon Snips is deciding between $1400 profit and $1,500 profit and since $1,500 is clearly better than4 $100 I'm going to put another star right there does Sharon have a dominant strategy in this case no because Sharon's Snips best move is dependent or depends upon what Twan trims does as a result Sharon Snips does not have a dominant strategy do we have a Nash equilibrium in this case we do a Nash equilibrium exists when if either player decides to change strategies they will have a worse outcome if twan's trims changes from maintaining price to lowering price he will lose $100 worth of profit if Sharon Snips changes strategies and goes from not advertising to advertising Sharon Snips loses $100 of profit as a result both entities would be worse off if either one switches strategies the Nash equilibrium is the most common outcome and that's where we're at here Sharon Snips is going to not advertise and Twan trim is going to maintain price we got through it that was a lot of information there and if you knew it all you are on your way to acing your next exam if you need a little more help head down to the links below where there are lots of games and activities from reviewe eon.com to help you study and practice the skills you need for that next exam if you want to support this channel make sure you like And subscribe and then head over to reviewe eon.com and pick up the total review booklet with everything you need to know to pass your final exam or AP economics exam thank you very much I'll see you guys next time