4.1 - intro to imperfectly competitive markets

Barriers to entry

• an imperfectly competitive market exists because of high barriers to keep other firms from entering

• because an imperfectly competitive market is where firms have control over price because other competitors aren’t pressing prices down and impacting those prices due to it being harder to enter the market

Perfectly competitive firms

price takers so demand is constant and equal to marginal revenue 

why? - since consumers buy as much as a firm produces the demand is constant and since everything is sold for the same exact price each one will give the same revenue 

P = MR = D

imperfectly competitive firms 

the firms have some control over the brice due to high barriers of entry 

the demand curve sloped downwards so demand decreases as the price increase therefore the marginal revenue will be less than price as less revenue is made on each item sold 

Elastic vs inelastic range of demand curve

TR test = if the total revenue increases when price decreases the demand is elastic 

why? - if the total rev increases despite price dropping it means a crazy amount of product was sold when price dropped showing how consumers are very responsive to a price change = elastic 

TR test = if price fallas and total revenye falls the demand is inelastic as the consumers arent reactive enough to the price change 

Monopolist at a profit maximising output level

the firms must lower the price to sell morem so the mr would be lower than the price duh

Monopolies are inefficient because theyyyy

charge a higher price than what it costs to make in order to meet demand. They take where MR = MC to maximise profit

• To sell more, you have to lower the price on ALL units, not just the new one.

• That reduces revenue on units you already sold, so the extra money you get from selling one more unit (MR) is less than the price you charge

• To make the most money → stop producing where MR = MC

• End result → monopoly sells less than efficient quantity and charges P > MC

market share

• how much of all the sales in a market one firm controls

• a monopoly can still have some competitors but what matters is how big its share of total sales is. If one firm sells most of the product it has monopoly power

Can a monopoly be good for the economy?

its not practical to have lots of small firms as its more expensice but one big firm can serce everyone more efficiently anc cheaply

Natural monopoly

it is natural for only one firm to produce because they can produce at the lowest cost due to economies of scale cuz when a firm gets bigger they can produce more cheaply

Monopoly characteristics

• one large firm

• unique product

• high barriers

• price maker

• some advertising

monopoly power

a firm can contriol price cuz its the only seller so by making it harder to enter they keep the power

Monopolies are inneficient

• charge a higher price

• dont produce enough

• produce at hiher costs 

Monopolies vs perfect competition

• in perfect competition cs and ps are maximised

• at mr = mc a monopolist will product less and charger a higher price

allocative efficiency

when the value consumers place on a product (price) is equal to the cost of the resources used to make it

P = MC

econ + accounting profit

if Price > ATC = economic profit

if price = atc = breka even (accounting profit)

if price < atc = negative accounting profit 

impact of per unit subsidy

• MC will decrease and intersect MR at a higher quantity so quantity would increase

• consumer surplus would also increase cuz costs decrease but demand stays the same 

impact of lump sum subsidy

MC curve stays the same so MR = MC is still the same btw soooo doesnt change DWL

impact of lump sum tax

• doesnt change price or mc

• profit max doesnt chane ofc

MR less than demand

MR less than price

• when u make things cheaper to sell more ( meet high demand) you earn less money on each subsequent product so price and MR are decreasing