AP Microeconomics Unit 4: Imperfect Competition

Perfect Competition

1. Large number of small firms

2. Low barriers to entry

3. Zero long run economic profit

4. Price takers

5. Demand is constant (D = MR)

Monopolistic Competition

1. Large number of sellers

2. Differentiated products

3. Some control over price

4. Low barriers to entry

5. Lots of advertising

Oligopoly

1. Few large producers

2. Mutually interdependent

3. High barriers to entry

4. Control over price

5. Identical or differentiated products

Monopoly

1. One large firm

2. Unique products

3. High barriers to entry

4. Price makers

5. Some advertising

6. Usually inefficient

Profit-Maximizing Quantity

MR = MC

Revenue-Maximizing Quantity

MR = 0

Allocatively Efficient Quantity

P = MC (D = MC)

Productively Efficient Quantity

MC = ATC

Collusion

The highest combined profit

Strictly Dominant

One choice is always better than the other, regardless of what the opponent does

Weakly Dominant

One choice is always better or equal to the other, regardless of what the opponent does

Cartel

A group of producers that create an agreement to fix high prices

Natural Monopoly

1. One firm

2. Produces at the allocatively efficient point (socially optimal point)

3. Due to economies of scale

4. ATC is falling

Price Discrimination

The practice of selling the same products to different buyers at different prices

Price Discrimination Conditions

1. Must have monopoly power

2. Must be able to segregate the market

3. Customer must not be able to resell the product

Profit

When ATC is below the demand line

Loss

When ATC is above the demand line

Total Revenue

TR: P * Q

• The box from Q1 to the demand line

Total Cost

TC: P (at ATC line) * PMQ

• The box from Q1 to the ATC curve

Deadweight Loss

A = 1/2(B)(H)

Imperfect Competition

1. Price makers

2. Downward sloping demand curve

3. To sell, a firm must lower its price

4. P is greater than MC

Dominant Strategy

The best move to make regardless of what your opponent does

Price Leadership

A strategy used by a firm to coordinate prices with other firms without outright collusion.

• Occurs in an oligopoly

Nash Equilibrium

The optimal outcome that will occur when both firms make decisions simultaneously and have no incentive to change

Excess Capacity

Given current resources, a firm can produce at the lowest costs but they have decided not to

Short-Run Profit

1. New firms enter

2. More close substitutes and less market shares for existing firms

3. Demand for each firm falls

Short-Run Losses

1. Firms exit

2. Less substitutes and more market shares for existing firms

3. Demand for each firm rises

Unit Elastic

MR = 0 (on demand curve)

Elastic

Quantities before MR = 0 on demand curve

Inelastic

Quantities after MR = 0 on demand curve

Why Are Monopolies Inefficient?

1. They charge a higher price

2. They don’t produce enough (Not AE)

3. They produce at higher costs (Not PE)