AP Microeconomics: Unit 4

0.0(0)
studied byStudied by 0 people
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/51

encourage image

There's no tags or description

Looks like no tags are added yet.

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

52 Terms

1
New cards

5 Characteristics of a Monopoly

1) Single Seller

2) Unique good with no close substitute

3) "Price Maker"

4) High Barriers to Entry

5) Some "Nonprice" Competition

2
New cards

Single Seller (1)

-one firm controls the vast majority of a market

-firm=industry

3
New cards

"Price Maker" (3)

-firm can manipulate price by changing the quantity produced (ie. shifting supply to the left)

4
New cards

High Barriers to Entry (4)

-new firms CANNOT enter market

-no immediate competitors

-firms can make profit in the long-run

5
New cards

Some "Nonprice" Competition (5)

-monopolies still advertise their products in an effort to increase demand

6
New cards

Four Origins of Monopolies (Barriers to Entry)

1) Geography

2) Government

3) Technology or Common Use

4)Mass Production and Low Costs

7
New cards

Main difference between Monopolies and Perfect Competition

MARGINAL REVENUE DOES NOT EQUAL PRICE (MR LESS THAN PRICE)

-monopolies (and all imperfectly competitive firms) have downward sloping demand curve

8
New cards

How does a firm sell more in a monopoly?

A firm must lower its price

9
New cards

Total Revenue Test

If price falls and TR increases, then demand is elastic;

If price falls and TR falls, then demand is inelastic

(A monopoly will only produce in the elastic range)

10
New cards

Where do monopolists produce?

Where MR=MC, but it charges the price consumers are willing to pay identified by the demand curve

11
New cards

Are monopolies efficient?

No, monopolies under-produce and overcharge

12
New cards

What happens to CS and PS for a monopoly?

CS decreases

PS increases

Total Surplus decreases

There is now DWL

13
New cards

Are monopolies productively efficient?

No, they are not producing at the lowest cost (minimum ATC). Instead, they will maximize profit by finding MR=MC

14
New cards

Are monopolies allocatively efficient?

No, price is greater and the monopoly is under producing

15
New cards

Why are monopolies inefficient?

1) Charge a higher price

2) Don't produce enough (Not allocatively efficient)

3) Produce at higher costs (Not productively efficient)

4) Have little incentive to innovate (little external pressure to be efficient)

16
New cards

Natural Monopoly

One firm can produce the socially optimal quantity at the lowest cost due to economies of scale

-It is better to have only one firm because ATC is falling at socially optimal quantity

17
New cards

socially optimal quantity

What society wants, or where supply (MC) meets demand

18
New cards

Lump Sum

Does not change output, does not change MC

19
New cards

Why would the government regulate a monopoly?

1) To keep prices low

2) To make monopolies efficient

20
New cards

How does the government regulate monopolies?

Use Price Controls: Price Ceilings

21
New cards

Why don't taxes work for regulating monopolies?

Taxes reduce supply and that is the problem-monopolies are already unde-rproducing to begin with

22
New cards

Socially Optimal Price

P=MC (Allocative Efficiency)

23
New cards

Fair-Return Price (Break-Even)

P=ATC (Normal Profit, no economic profit)

24
New cards

Where should the government place the price ceiling in a monopoly?

Socially Optimal Price

-what society wants-using all resources

25
New cards

What happens if the government sets a price ceiling to get the socially optimal quantity in a natural monopoly?

The firm would make a loss and would require a subsidy

26
New cards

Price Discrimination (definition)

Practice of selling the same product to different buyers at different prices

Ex: Airline Tickets, Movie Theaters, Coupons, GBHS Football Games

27
New cards

Price Discrimination (concept)

-Seeks to charge each consumer what they are willing to pay in an effort to increase profits

-Those with inelastic demand are charges more than those with elastic

-Socially optimal quantity is higher

WHEN PRICE DISCRIMINATION, MR=D

28
New cards

Requirements for Price Discrimination

1) Must have monopoly power

2) Must be able to segregate the market

3) Consumer must NOT be able to resell product

29
New cards

Price for Discriminating Monopoly

range, no set price; monopolies will still accept the price until it hits minimum ATC because there is still a profit

30
New cards

What happens to profit, CS, and DWL in a price discriminating monopoly?

-more profit

-no CS; everyone is paying what they are willing to pay

-DWL is gone

31
New cards

What happens if the government sets a price ceiling to get the socially optimal quantity in a natural monopoly?

The firm would make a loss and would require a subsidy

32
New cards

Monopolistic Qualities

-control over price of own good due to differentiated product

-D greater than MR

-plenty of advertising

-not efficient

33
New cards

Perfect Competition Qualities

-large number of smaller firms

-relatively easy entry and exit

-zero economic profit in long-run since firms can enter

34
New cards

Monopolistic Competition Characteristics

-relatively large number of sellers

-differentiated products

-some control over price

-easy of entry and exit (low barriers)

-a lot of non-price competition (advertising)

35
New cards

Differentiated Products

-goods are NOT identical

-firms seek to capture a piece of the market by making unique goods

-firms use NON-PRICE Competition because these products have substitutes

36
New cards

Non-Price Competition

-brand names and packaging

-product attributes

-service

-location

-advertising

37
New cards

Two Goals to Advertising

1. Increase Demand

2. Make demand more INELASTIC

38
New cards

What does the short-run in monopolistic competition look like?

Monopolistic Competition is made up of price makers, so MR is less than demand and it is the same graph as a monopoly making profit

39
New cards

What happens to monopolistic competition in the long-run?

New firms will enter, driving down the DEMAND for firms already in the market until there is no economic profit; price and quantity falls and TR=TC

40
New cards

Long-run Equilibrium for Monopolistic Competition

Quantity where MR=MC up to Price=ATC

41
New cards

What happens when short-run profits are made in monopolistic competition?

-new firms enter

-more close substitutes and less market share for each existing firm

-demand for each firm falls

42
New cards

What happens when short-run losses are made in monopolistic competition?

-firms exit

-less substitutes and more market shares for remaining firms

-demand for each firm rises

43
New cards

What happens when there is a loss in monopolistic competition?

In the short-run, the graph is the same as a monopoly making a loss; in the long-run, firms will leave, driving up the DEMAND for firms already in the market

44
New cards

Are monopolistically competitive firms efficient?

No; not allocatively efficient because P≠MC and not productively efficient because it isn't producing at minimum ATC

45
New cards

Excess Capacity

-given current resources, the firm CAN produce at the lowest costs (minimum ATC) but they decide not to

-it is the gap between the minimum ATC output and the profit maximizing output, not the amount underproduced

46
New cards

Excess Capacity (reason)

The firm can produce at a lower cost but it holds back production to maximize profit

47
New cards

Advantages of Monopolistic Competition

-large number of firms and product variation meets society's needs

-Non-price Competition (product differentiation and advertising) may result in sustained profits for some firms

Ex: Nike, Apple might continue to make above normal profit because they are well-known

48
New cards

Characteristics of Oligopolies

-few large producers (less than 10)

-identical or differentiated products

-high barriers to entry

-control over price (price maker)

-mutual interdependence (firms use strategic pricing)

Ex: cereal companies, car producers

49
New cards

oligopoly

occurs when only a few large firms start to control an industry

-must use strategic pricing

-have a tendency to collude to gain profit

-collusion=incentive to cheat

-makes informed decisions based on their dominant strategies

50
New cards

collusion

the act of cooperating with rivals in order to "rig" a situation

51
New cards

Barriers to Entry for Oligopolies

1. Economies of Scale

2. High Start-up Costs

3. Ownership of Raw Materials

52
New cards

Game Theory

the study of how people behave in strategic situations