Final Exam Study Guide
Chapter 9
What are the 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
• What does it mean to be a price taker?
* A firm cannot influence the market price; it must accept the price set by supply and demand.
* Selling more or less doesn't change the price.e
• What is marginal revenue?
* The additional revenue a firm earns by selling one more unit
* In perfect competition, MR=Price because each unit sells at the same price
• What does the demand curve look like for a perfectly competitive firm?
* Perfectly elastic (Horizontal line) at market price
* Reflects the idea that the firm can sell any amount at the price, but not above it
• What does the supply curve look like for a perfectly competitive firm in the short run?
* The firm's supply curve is the portion of the marginal cost (MC) curve above the average variable cost.
o What about in the long run?
* The supply curve is the portion of the MC curve above the long-run average total cost
* p=MC=ATC, and firms earn zero economic profit
• Profit maximizing rule:
* What is it?
* Profit is maximized where MR = MC
* How is it calculated?
* MR=MC
* MR>MC Firms should increase output
* MR<MC Firms should decrease output
* What does the graph look like?
* Where the MR curve (horizontal) intersects the MC curve
• In the short run: When to shut down?
* Covering variable cost
o What is the outcome if
* P > ATC?
* Profit
* ATC>P>AVC?
* Loss but stays open
* AVC>P?
* Shutdown
o What about the long run?
* P=MC=ATC —-> Zero profit
• What are sunk costs?
* Costs that have already been incurred and cannot be recovered.d
Chapter 10
What are the 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)
• What does it mean to be a price maker?
* Sets its price by choosing how much to produce
* Face the market demand curve directly
* Raising quantity requires lowering the price, and vice versa
• What are barriers to entry?
* Prevent other firms from entering the market, protecting the monopoly. Are all barriers to entry the same?
* No
How are those barriers created?
* Not as equally strong or permanent ( legal barriers vs. natural monopolies)
• Is the MR curve the same as the Demand curve for a monopoly?
* No
* MR > Price because it must lower the price to sell additional units
If not, why is that?
* Faces a downward-sloping demand curve, unlike perfect competition
* Selling one more unit requires dropping the price for all units sold
▪ What is the price effect?
* Revenue decreases because the price must drop on all units sold
Output effect?
* Revenue increases from selling more units.
• Compare a competitive market (a firm in perfect competition) to a monopolist – how are
They are similar, how are they different
Feature
Perfect Competition
Monopoly
Number of Firms
Many
One
Price Control
None (Price taker)
Full (Price maker)
Entry/Exit
Free
Blocked by barriers
Demand Curve
Perfectly elastic (horizontal)
Downward-sloping
MR = P?
Yes
No, MR < P
Long-Run Profit
Zero (P = ATC)
Possible economic profit
Efficiency
Allocative & Productive efficiency
Inefficient (deadweight loss)
• Do they earn long-run economic profit?
* Yes, because barriers to entry prevent competition, monopolies can earn economic profit in the long run.
• What are the problems with monopolies?
* Higher Prices
* Deadweight Loss
* Reduced Consumer Surplus
* Lack of Innovation/Incentive
* Inefficient allocation of resources
• What are some solutions to monopolies
Approach
Explanation
Antitrust laws
Break up or prevent anti-competitive mergers
Regulation
The government sets prices or output (e.g., utilities)
Public ownership
Gov’t takes over (e.g., postal service)
Encourage competition
Reduce barriers, allow substitutes
Patent reforms
Prevent overuse or abuse of the patent system
Chapter 11
• What is price discrimination?
* When a seller charges different prices to different consumers for the same good or service, not based on cost differences, but on willingness to pay
Is it bad? DEPENDS
* Can be bad: May reduce consumer surplus and seem unfair
* Can be good: Increase market efficiency, allow more people to access a product, and help firms cover costs
• What are the conditions for successful price discrimination?
* Have market power
* Segment the market
* Prevent resale
• Examples of price discrimination
* Movie theaters, Airlines, Textbooks, Coupons
• What is perfect price discrimination?
* Each consumer is charged exactly their maximum willingness to pay
• What is second-degree price discrimination?
* Prices vary based on the quantity or version bought
Third degree?
* Prices differ based on consumer groups with different elasticities.
Chapter 12
What is monopolistic competition?
* A market structure with many sellers offering differentiated but similar products
What are its characteristics?
* Many firms
* Free entry and exit
* Product differentiation
* Firms have some market power
* Downward-sloping demand curve
* Firms are price makers, but not as powerful as monopolies
How are they like a competitive market (perfect competition)?
* Many Firms
* Free entry and exit
* Zero long-run economic profit
How is Tilted a monopoly?
* Firms have some control over price
* Downward-sloping demand curve
* Each firm faces its oemand curve
* Not allocatively or productively efficient
• How are output levels and prices compared to competitive markets and monopolies?
Market Type
Output Level
Price Level
Perfect Competition
Highest (efficient)
Lowest (P = MC = ATC)
Monopolistic Competition
Medium
Medium (P > MC)
Monopoly
Lowest
Highest (P > MC)
• What is product differentiation?
* Firms make their products appear unique in some way
Types?
* Physical Differences
* Location
* Brand Image
* Service
• What happens to a monopolistically competitive firm in the short run?
* Can earn profits or incur losses
Are they profitable? DEPENDS
• What happens to a monopolistically competitive firm in the long run?
* Economic profit = 0
• What is a markup?
* Price - Marginal Cost
* Shows how much more a firm charges above MC due to productdifferentiationn
Does markup make P > ATC?
* No
Chapter 13
What is an oligopoly?
* A market structure where a few large firms dominate the industry
What are its characteristics?
* A few dominant firms control
* Products can be identical or differentiated
* High barriers to entry
* Price makers, but their pricing depends on rivals
* Murual interdependence
How are they alike to the other 3 market structures?
* Perfect competition ( may compete on price)
* Monopolistic Competition ( May have product ddifferentiations
* Monopoly ( Few Firms )
• How are output levels and prices compared to competitive markets and monopolies?
Market Type
Output Level
Price Level
Perfect Competition
Highest
Lowest (P = MC)
Oligopoly
Medium
Medium (P > MC)
Monopoly
Lowest
Highest (P > MC)
• What is a duopoly?
* The simplest form oligopoly with only two firms in the market
• What does it mean if firms collude?
* When a firm agrees to set prices, limit output, and divide markets.
• What is a cartel?
* A formal agreement between firms to collude on price and output
Why are they unstable in the long run?
* Incentive to cheat
* illegal
• Does mutual interdependence happen in oligopolies?
* yes
What is it?
* One firm's actions affect the others