econ 4 Setting Prices When You Have Market Power

These flashcards cover key concepts related to market power and pricing strategies, including definitions and important relationships between marginal revenue and demand.

Market Power

The ability of a firm to influence the price of a good or service, rather than taking the market price as given.

Firm Demand Curve

Quantity demanded from a single firm.

Market Demand Curve

Total quantity demanded across all firms.

Total Revenue (TR)

Calculated as TR = Price × Quantity sold.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit; often less than the price in imperfect competition.

Output Effect

Revenue increases by the price of the extra unit sold.

Discount Effect

Revenue decreases because lowering the price to sell one more unit reduces revenue from all previous units.

Rational Rule for Sellers, Step 1

Set quantity where MR = MC.

Rational Rule for Sellers, Step 2

Set price by looking up to the demand curve for the chosen quantity.

Economic Surplus

Firms with market power restrict output to maximize profit, resulting in market outcomes that do not maximize total economic surplus.

Linear Demand Curve

If the demand curve is linear, the MR curve is also linear, starting at the same point but declining twice as steeply.