Ap Micro unit 4 from video

Monopoly

A market structure where a single firm controls the entire market, produces a unique product with no close substitutes, and faces high barriers to entry.

Price Maker

A firm with market power that can determine its own price rather than taking the market price (e.g., Monopolies).

Natural Monopoly

A market where one firm can produce the socially optimal quantity at the lowest cost due to massive economies of scale.

Price Discrimination

Charging different prices to different consumers for the same product to maximize producer surplus (only possible for monopolies).

Monopolistic Competition

A market structure with many firms selling differentiated products, low barriers to entry, and significant advertising.

Excess Capacity

The difference between the output a monopolistically competitive firm produces and the output that minimizes average total cost ($Q_{min}$).

Oligopoly

An industry dominated by a few large firms (10 or less) characterized by high barriers to entry and mutual interdependence.

Mutual Interdependence

A situation in oligopolies where each firm's decisions significantly affect and depend on the actions of its competitors.

Game Theory

The study of how people or firms behave strategically in situations involving interdependent choices.

Dominant Strategy

A strategy that is the best for a firm no matter what strategies other firms choose.

Nash Equilibrium

A situation where each firm chooses the optimal strategy given the strategies chosen by other firms.

Profit Maximization Rule

The universal rule for all market structures: produce where Marginal Revenue equals Marginal Cost ($MR = MC$).

• What it shows: In the long run, monopolistically competitive firms earn zero economic profit because easy entry and exit eliminate economic profits or losses.

• Key Features:

  • The Demand (DD) / Average Revenue (ARAR) curve is downward sloping due to product differentiation.

  • Marginal Revenue (MRMR) lies below the demand curve.

  • Profit maximization occurs where MR=MCMR=MC (at quantity Q∗Q∗).

  • In long-run equilibrium, the Average Total Cost (ATCATC) curve is tangent to the demand curve at the price where P=ATCP=ATC, meaning firms make normal profit (zerozero economic profit). Notice there is also excess capacity (producing less than the cost-minimizing output QminQmin​).

• What it shows: A single-firm market with high barriers to entry where the firm acts as a price maker.

• Key Features:

  • Profit Maximization (MR=MCMR=MC): The monopolist produces where MR=MCMR=MC and charges the highest price consumers are willing to pay (found by going straight up to the Demand curve).

  • Inefficiency: Monopolies create deadweight loss because they produce less and charge more than socially optimal markets.

  • Socially Optimal Price (P=MCP=MC): Where the marginal cost curve intersects the demand curve (achieves allocative efficiency).

  • Fair-Return Price (P=ATCP=ATC): Where the average total cost intersects demand, allowing the firm to break even without losing money.