AP Microeconomics: Unit 4: Imperfect Competition

Perfect Competition

# of firms: Many

Type of product: Standard

Price control: None

Barriers of entry: None

Monopolistic competition

# of firms: Many

Type of product: Different 

Price control: Little

Barriers of entry: None (few)

Monopoly

# of firms: 1 (no substitutes)

Type of product: Unique

Price control: Yes

Barriers of entry: High

Not efficient: high costs and don’t produce enough

Oligopoly

# of firms: Few

Type of product: Standard/different

Price control: Some

Barriers of entry: High

Barrier in entry in imperfect competition

Control of scarce resources, legal barriers, high startup costs

Price discrimination

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

Ex: Airplane tickets 

Price discriminating monopoly

• Tries to charge each consumer what they are willing to pay to increase their total profit

• Those products with more inelastic demand are charged more than those with an elastic demand

Price discrimination requires the following conditions:

• Must be a monopoly market 

• Must be able to segregate consumers in the market 

Consumers must NOT be able to resell product

In a monopoly graph quantity and price is

MR=MC

Monopoly supply curve

MC > AVC

Monopoly is allocatively efficient due to

producing at MR=MC

Monopoly is productively inefficient because

they don’t produce at the minimum of ATC

Natural monopoly

It is NATURAL for only one firm to produce because they can produce at the lowest cost

• large fixed costs

• long economies of scale

• downward sloping ATC curve

Natural monopoly production point

MR=MC

Natural monopoly set price

Government will correct by forcing them to set price : at ATC=D

Imperfect price discrimination

Charging consumers different prices based on the buyer’s willingness to pay

Perfect price discrimination

Charges all consumers the maximum they are willing to pay, no deadweight loss, produce at P=MC

• Example : resellers, coupons, bulk buying (costco), etc.

Price discrimination graph REMEMBER

• More profit for producer

• No dwl

• No cs

• Only ps

Economies of scale in a market

Make it impractical to have smaller firms competing in the market

Natural monopoly example

Electric Companies 

• If there were three competing electric companies they would have higher costs and it would be chaos

• Having only one electric company keeps prices low

Why keep a monopoly

• To keep prices low

• To make monopoly markets more efficient 

At what price will the government have the monopoly produce?

Socially optimal price

P = MC (allocative efficiency)

At what price will the government have the monopoly produced?

Fair return price (break-even)

P = ATC