micro CRAM unit 4

imperfect competition characteristics

• there are barriers to entry (some may be high)

• different products

• fewer sellers

• price MAKERS

TR =

TR=P x Qd

MR =

Change in TR//Change in P

monopolies have…

• one seller

• no substitutes

• high barriers to entry

• some advertising

• Price MAKERS

natural monopoly

one single business w/o any competition b/c of land or other raw resources (ie sewage company)

• natural for them to be sole firm to produce b/c they can produce at the LOWEST cost

profit maximizing for monopolies

still the same; MR=MC but price has to ping upwards and hit Demand curve

are monopolies allocatively efficient

NO b/c this happens when P=MC, and in a monopoly they usually set the price higher than MC to max. profit. (meaning too little is being produced to what society wants)

are monopolies productively efficient

NO b/c productive efficiency means producing at the lowest possible cost and monopolies don’t do this b/c they have to maximize profits

price discrimination

seller can charge each individual buyer what they are willing to pay rather than having a set price for all.

non price competition

strategies firms use to attract customers w/o changing price of products (advertising, branding, customer service)

ALL IMPERFECT MARKET STRUCTURES ARE??

INEFFICIENT (there will always be deadweight loss)

MR hitting the x axis (0) on the monopoly graph is…

revenue maximizing point

do all monopolies make profit?

no (peeco, postal office)

When will a monopoly stop producing in the short-run?

when P < AVC

in a natural monopoly…

• MC=D is socially optimal

• ATC=D is fair return price

• MC=MR is profit maximization

in a price-discrimination market…

those w/ inelastic demand are charged higher than those with elastic

price discrimination conditions

• must have monopoly power

• must be able to segregate the market

• consumers must NOT be able to resell products

for a price discrimination monopoloy…

MR=D (just one line unlike split for monopoloy)

• no price, consumer surplus

• no DWL

• p-d results in several prices, more profit, no CS, and a higher socially optimal quantity, so no DWL

monopolistic competition

another term for imperfect competition, where many companies offer similar but competing products but aren’t perfect substitutes. (ex: fast food, furniture, jewelry)

characteristics of monopolistic competition

• combines features of both monopolies and perfect comp

• many sellers with differentiated products

• will use advertising to make demand more inelastic + differentiate the product

• makes profit in the short run and normal profit in the long run

• allocatively inefficient (P doesn’t not equal MC) and productively inefficient (doesn’t product at min. ATC until long run)

• downwards sloping demand curve

• produce at MR=MC price up to demand

in the long run…

new firms will enter driving down demand for firms already in the market

mutual interdependence

firms use strategic planning

game theory

study of how people behave in strategic situations

oligopolies are interdependent b/c…

they have to anticipate and react to the decision of competitors.

in an oligopoly

pricing and output decisions must be strategic.

dominant strategy

best move to make regardless of what your opponent does

Nash equilibrium

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

oligopolies have tendency to ______ to gain profit

collude; collusion is the act of cooperating w/ rivals in order to rig a situation

• collusions result in an incentive to cheat

• price leadership (small town gas stations)

• colluding oligopoly (drug organizations)

• non colluding oligopoly