Final Exam Study Guide

Chapter 9: Perfect Competition

Characteristics of Perfectly Competitive Firms

• Many buyers and sellers
• Identical products
• Free entry and exit from the market
• Perfect information
• No control over price

Examples

• Agriculture products

Price Taker

• A firm cannot influence the market price; must accept the price set by supply and demand.
• Selling more or less doesn't change the price.

Marginal Revenue

• Additional revenue from selling one more unit.
• In perfect competition, MR = Price because each unit sells at the same price.

Demand Curve

• Perfectly elastic (horizontal line) at market price.
• Reflects the idea that the firm can sell any amount at the price, but not above it.

Supply Curve

• Short Run: Portion of the marginal cost (MC) curve above the average variable cost.
• Long Run: Portion of the MC curve above long-run average total cost.
• P = MC = ATC, and firms earn zero economic profit.

Profit Maximizing Rule

• Profit is maximized where MR = MC.
• Calculation:
  • MR = MC
  • MR > MC: Increase output
  • MR < MC: Decrease output
• Graph: Intersection of MR curve (horizontal) and MC curve.

Short Run: When to Shut Down?

• Covering variable cost is key.
  • P > ATC: Profit
  • ATC > P > AVC: Loss but stays open
  • AVC > P: Shutdown

Long Run

• P = MC = ATC → Zero profit

Sunk Costs

• Costs that have already been incurred and cannot be recovered.

Chapter 10: Monopoly

Characteristics of Monopoly Firms

• Single seller in the market
• No close substitutes for the product
• High barriers to entry
• Price maker
• Downward-sloping demand curve

Examples

• Local water utilities
• Microsoft
• Pharmaceutical companies

Price Maker

• Sets its price by choosing production levels.
• Faces the market demand curve directly.

Barriers to Entry

• Protect the monopoly by preventing entry.
• Types: Legal barriers vs. natural monopolies.

MR Curve vs. Demand Curve

• MR ≠ Demand curve
  • MR < Price because price reduction needed to sell additional units.

Market Effects

• Price Effect: Revenue decreases due to price drop on all units.
• Output Effect: Revenue increases from selling more units.

Comparison: Competitive Market vs. Monopolist

• Perfect Competition
  • Many firms, no price control, free entry/exit.
  • Perfectly elastic demand curve.
  • Zero long-run profit.
  • Allocative & productive efficiency.
• Monopoly
  • One firm, full price control, high entry barriers.
  • Downward-sloping demand curve.
  • Possible economic profit.
  • Inefficient (deadweight loss).

Monopoly Problems

• Higher prices
• Deadweight loss
• Reduced consumer surplus
• Lack of innovation/incentive
• Inefficient resource allocation

Solutions to Monopolies

• Antitrust laws: Prevent anti-competitive mergers
• Regulation: Government sets prices/output (utilities)
• Public ownership: Government management (e.g., postal service)
• Encourage competition: Reduce barriers, allow substitutes
• Patent reforms: Prevent overuse/abuse

Chapter 11: Price Discrimination

Definition

• Charging different prices to different consumers for the same product not based on cost differences but on willingness to pay.

Is Price Discrimination Bad?

• Bad: May reduce consumer surplus and seem unfair.
• Good: Increases market efficiency, allows broader access, helps firms cover costs.

Conditions for Successful Price Discrimination

• Market power
• Market segmentation
• Prevention of resale

Examples

• Movie theaters, airlines, textbooks, coupons

Types of Price Discrimination

• Perfect: Each consumer is charged their maximum willingness to pay.
• Second-degree: Prices vary by quantity/version.
• Third-degree: Prices differ by consumer group elasticities.

Chapter 12: Monopolistic Competition

Definition

• A market structure with many sellers offering differentiated but similar products.

Characteristics

• Many firms
• Free entry and exit
• Product differentiation
• Some market power
• Downward-sloping demand curve
• Firms as price makers, but less powerful than monopolies.

Similarities to Perfect Competition

• Many firms
• Free entry and exit
• Zero long-run economic profit

Differences from Monopoly

• Some control over price
• Downward-sloping demand curve
• Unique demand curve for each firm
• Not allocatively or productively efficient

Output Levels and Prices

• Market Type
  • Perfect Competition: Highest output, lowest price (P = MC = ATC)
  • Monopolistic Competition: Medium output and price (P > MC)
  • Monopoly: Lowest output, highest price (P > MC)

Product Differentiation

• Firms make products appear unique
• Types: Physical differences, location, brand image, service

Short Run Outcomes

• Profits or losses possible.

Long Run Outcomes

• Economic profit = 0

Markup

• Difference between Price and Marginal Cost.
• Reveals pricing power over MC due to differentiation.
• Markup does not make P > ATC.

Chapter 13: Oligopoly

Definition

• A market structure where a few large firms dominate the industry.

Characteristics

• Few dominant firms
• Products can be identical or differentiated
• High barriers to entry
• Price makers, but pricing depends on rivals
• Mutual interdependence

Similarities to Other Market Structures

• Perfect Competition: May compete on price
• Monopolistic Competition: May have product differentiation
• Monopoly: Few firms

Output and Price Levels

• Market Type
  • Perfect Competition: Highest output, lowest price (P = MC)
  • Oligopoly: Medium output and price (P > MC)
  • Monopoly: Lowest output, highest price (P > MC)

Duopoly

• Simplest form of oligopoly with two firms.

Collusion

• Firms agree to set prices, limit output, divide markets.

Cartel

• Formal agreement to collude on price and output.
• Unstable due to cheating incentives and legality issues.

Mutual Interdependence

• Actions of one firm affect others.