Unit 4 AP Microeconomics

What are factors to help determine if something is perfect or imperfect competition?

1) # of competitors

2) types of products

3) price control

4) barriers

5) long run profit

What are the Charc. of Perfect comp?

large number of competitors, standardized products, no barrier to entry, no price control, no long-term profit

What are the charc. of monopolistic competition?

there are many competitors but the four largest control less than 40% of market, differentiated product, no barrier to entry, limited price control, no long-term profit

What are the charc. of oligopolistic competition?

the 4 largest control more than 40%, the products can be standard OR differentiated, barriers to entry, significant price control, and positive long term profit is possible

What are the charc. of a monopoly?

1 firm, type of product in N/A, there are barriers to entry, there is 100% price control, and pos LR profit is possible

What is LR EP affected by?

barriers to entry

what is price control influenced by?

the # of competitor and types of products

How are imperfect competitive firms relates to price control?

all imperfect have some form of price control

-they are price-MAKERS and face a downward sloping curve

Where does a firm gain the ability to determine the price?

it depends on the type of product, the amount sold, or the amount of competition

Graph of imp. comp?

SEE NOTES and draw it out

-DARP > MR

Where is the max for total revenue in imp comp?

where the MR crosses the X-axis

What does a graph of a monopoly look like?

its the same as the market graph (b/c the entire market is that one firm)

-they have a downward sloping demand curve and MR < D (if it is perfectly elastic, MR = D)

How to find profit-maximizing quantity and price in a monopoly?

MR = MC (you charge the price from the demand curve and then follow it to where the Qe intersects demand)

how to tell id a demand curve is elastic?

MR > 0, TR is inc

how to dell if a demand curve in inellastic?

MR < 0, TR is dec

How to tell if a demand curve is unit ellastic?

MR = 0, and TR is max

allocative efficient?

P = MC, the price of goods should equal the value of what was used to produce it)

Productive efficient?

P = min ATC

the least costly production technique

Why are imperfect competition system inefficient?

there are barrier to entry so there is limited competition, there is price control so the firms can determine their own price, and unlike PerfComp, there is no reason to keep the price at the market equil. quantity that ensures efficiency

-in ImpCom, the P is set by MC and a MR that is less than D

What is a natural monopoly?

when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms (ie electricity, utilities, transportation)

How do natural monopolies affect economies of scale?

- EOS will not continue forever: the costs of getting bigger will make coordination more expensive [opp to shirk]

When is it better to have a natural monopoly?

if the market demand can be satisfied w/in the economies of scale region, it is cheapest if just one firm supplies the market.

Why does anti-trust legislation unlikely to improve consumer welfare?

-this would break the monopoly and result in many small companies and then due to the high start up costs, the ATC inc and then the firm can't cover its own costs

-all these little firms would then shut down and leave a town without necessities w/out utilities.

what is price discrimination?

selling the same good at different prices to different consumers

What must a firm be able to do to effectively price discriminate?

-segment the market by elasticity

-do not need to be a monopoly, but must have market power

-prevent resale

-diff. between prices is not based on the cost of production

Why would firms price discriminate?

increase overall output

Does PD move the firm to or away from efficiency?

-PD leads to more output so it moves towards efficiency

Why doesn't everyone price discriminate?

-must know a lot about each customer

-Competition prevents competing firms from charging the highest possible price.

Monopolistic Competition?

-has both monopoly and perfect competitions characterisics

-key feature is product differentiation

-weakness is excess capacity

Characteristics of a monopolistic competition?

-ads make D less elastic

-marker power via differentiation

-DWL

-D > MR

-excess capacity

-AE, P > MC

-PIE, P > min LRATC

excess capacity?

difference b/2 where a firm produces and the amount where there is productive efficiency

Modeling a monopolistic market?

-can show if pos, zero, or neg economic profits

-if the firm is producing, it will have surplus, DWL and ecxess capacity ("price" of differentiation)

-the down slope of ATC must be tangents to D at Q

What is EP if DARP intersects an ip sloping ATC

pos

Whar is EP if DARP intersects down sloping ATC?

0 EP

Monopolistic market ir LRE?

-0 EP- no barriers

-no separate markets b/2 long and short

Oligopoly

4 largest firms control 40% of market

-price makers

-interdependent

=barriers to entry

-inflexible pricing

Charc of oligopoly?

-industry is dominated by a few producers, interdependent, cartel leads to power and profits but are often ubstable

cartel?

members join and collude to restrict output and gain monopoly prices. It is illegal in most cases

Tacit collusion and Price leasership

unspoken understanding that firms will not act tog; this makes it ver difficult to prove collusion

Strategic Choice/Game Theory?

due to interdependence, companies must take the possible responses of other companies into account when planning a course of actions

stable pricing over time?

short-term advantage to cheating, but "mature" oligopolies are implicitly cooperative since undercutting competitors tends to lower prices for all

Dominant Strategy?

max satisfaction regardless of the other's actions

Nash equil?

an outcome where each has made the best decision possible, given the actions of the other (no one can act unilaterally to improve the situation)

games Theory?

-ess a way to analyze firm's behavior

Dominant strat equil?

equil. result from each player following their dominant strat

payoff

outcome of a strat decision

best outcome?

combination of strat that yields highest joint profit

what is a double nash equil?

the 2 places where firms cannot improve on their own

how can govt affect game theory?

-they can pay a subsidy or charge a tax

how can the players influence game theory?

-they can make side payments