ap econ unit 4 test

monopoly

• a single producer of a good or service

• complete barriers to entry - usually on:

  • ownership of resources

  • economies of scale

  • gov regulation

• price maker

monopoly graph

• typical, downward-sloping Demand Curve

  • represents the entire market

• Marginal Revenue curve lies below demand curve

  • to draw more customers they must lower price for everyone - includes customers who would pay more

  • each additional unit sold lowers price for all

monopoly profit-maximizing Q/P

• quantity is always where MR = MC

• to find price go up to Demand Curve

monopoly profit and loss

• profit = (Price x ATC) x Quantity

  • if monopoly price is greater than ATC they have positive profit

  • if price is less than ATC they are incurring a loss

no productive/allocative efficiency

• monopolists don’t achieve productive efficiency bc they don’t produce at minimum ATC 

• also don’t achieve allocative bc they don’t produce where MC/S = D

  • there is deadweight loss (consumer + producer surplus)

  • value of mutually beneficial trades doesn’t happen bc of monopoly pricing

socially optimal (gov regulation of monopoly)

• forcing monopolist to produce socially-optimal quantity causes incurred losses

  • or produce at Fair-Return quantity (ATC = D)

  • still some deadweight loss at fair-return quantity

  • better outcome than no regulation

• smtimes gov will regulate monopoly

monopoly demand elasticity

• if MR is positive at the quantity they’re producing at: demand is elastic

• if MR is negative at the quantity they’re producing at: demand is inelastic

monopolistic competition

• many firms (similar to perf comp)

• easy entry and exit (like perf comp)

• similar, but differentiated product

• some control over price

monopolistic competition graph

• same as a monopoly graph

• in short-run, they earn positive economic profits (price is above ATC) or incur losses (price is below ATC)

monopolistic comp in the long-run

• diff from monopoly: monopoly has no long-run scenario

• firms will always break even in the long-run (like perf comp)

  • if firms are making profits in the short-run → more firms will enter → reduces profits to zero

  • firms losing money in short-run → firms will exit → profits back up to zero

oligopoly

• a few big firms

• significant barriers to entry (usually economies of scale)

• product can be similar (homogeneous - of the same kind)

• interdependent pricing (what one company does impacts the others)

game theory

• looks the same as the monopoly graph

• to evaluate an oligopolist’s decisions we typically look at a payoff matrix

• dominant strategy

dominant strategy

one choice is more profitable than the other no matter what the company decides