ap econ unit 4

Perfectly competitive firm

A firm that is a price taker and sells a homogeneous product in a market with many buyers and sellers

Price taker

A firm that must accept the market price because it has no control over price

Perfectly elastic demand (firm level)

Demand curve faced by a perfectly competitive firm; horizontal at the market price

Marginal revenue in perfect competition

Equal to demand and equal to the market price

Profit maximization rule

A firm maximizes profit by producing where marginal revenue equals marginal cost (MR = MC)

Zero economic profit

Occurs when total revenue equals total cost, including opportunity costs

Productive efficiency

Occurs when a firm produces at the minimum average total cost

Allocative efficiency

Occurs when price equals marginal cost (P = MC)

Long-run outcome in perfect competition

Firms earn zero economic profit and produce at minimum ATC

Free entry and exit

Firms can enter or leave the market without barriers, driving long-run profit to zero

Monopoly

A market structure where one firm controls the entire market

Barriers to entry

Obstacles that prevent new firms from entering a market, allowing long-run profits

Demand curve faced by a monopolist

Downward-sloping because the monopolist is the market

Marginal revenue for a monopolist

Lies below the demand curve

Price setting by a monopolist

Sets price from the demand curve at the quantity where MR = MC

Monopoly profit maximization

Produce where MR = MC and charge the price consumers are willing to pay

Price vs marginal cost in monopoly

Price is greater than marginal cost (P > MC)

Allocative inefficiency in monopoly

Occurs because P > MC, meaning too little output is produced

Productive inefficiency in monopoly

Occurs because the firm does not produce at minimum ATC

Long-run monopoly profit

Possible but not guaranteed, depending on costs and demand

Output comparison

A monopoly produces less output than a perfectly competitive market with the same costs

Price comparison

A monopoly charges a higher price than a perfectly competitive market

Deadweight loss

Loss of total surplus caused by allocative inefficiency when P ≠ MC

Monopolistic competition

A market structure with many firms selling differentiated products

Product differentiation

Products are similar but not identical

Demand in monopolistic competition

Downward-sloping due to product differentiation

Marginal revenue in monopolistic competition

Less than price, similar to monopoly

Long-run outcome in monopolistic competition

Firms break even (zero economic profit)

Efficiency in monopolistic competition

Neither allocatively nor productively efficient in the long run

Oligopoly

A market structure where a few large firms dominate the market