Ap econ unit 4.1-4.3 attempt 2

hopefully this set isnt trash

Regulating monopolies

governments regulate monopolies to keep prices low and make them efficient

Socially optimal price

P = MC and eliminates deadweight loss but is not profitable for monopolies

Fair return price

P = ATC allowing the firm to break even but not socially optimal

Subsidy for socially optimal price

government must subsidize monopoly to prevent losses at P=MC

Price discrimination

selling the same product at different prices to different buyers

Goal of price discrimination

charge consumers based on willingness to pay to increase profits

Inelastic consumers in price discrimination

charged higher prices

Elastic consumers in price discrimination

charged lower prices

Conditions for price discrimination

monopoly power and ability to segregate the market

Price discriminating monopoly rule

P = MR = D with no separate MR curve

Results of price discrimination

multiple prices

Characteristics of monopolistic competition

many sellers differentiated products some price control easy entry and exit non-price competition

Examples of monopolistic competition

fast food furniture jewelry hair salons clothing

Monopolistic qualities

price control differentiated products MR < D and inefficiency

Competition qualities

many firms easy entry/exit zero long-run economic profit

Differentiated products

goods are unique through service brand product location or advertising

Effects of advertising

increases demand and makes it more inelastic

Short-run monopolistic competition

firms can earn profit like a monopoly producing where MR=MC

Long-run monopolistic competition

entry of new firms lowers demand until zero economic profit

Reason for long-run outcome

short-run profit attracts entry lowering demand

Reason for long-run recovery from losses

firms exit raising demand for remaining firms

Long-run efficiency in monopolistic competition

not allocatively efficient (P ≠ MC) and not productively efficient (not at min ATC)

Excess capacity in monopolistic competition

firms produce less than min ATC due to differentiation

Cause of excess capacity

difference between min ATC output and MR=MC output

Oligopoly characteristics

few large producers identical or differentiated products high barriers price control mutual interdependence

Why oligopolies form

few big firms dominate and high entry barriers stop others

Types of barriers to entry

economies of scale high startup costs ownership of raw materials

Game theory

study of strategic behavior in situations where outcomes depend on others

Oligopoly interdependence

firms’ decisions affect each other

Prisoners’ dilemma outcome

both firms choose the option that leaves them worse off than cooperation

Dominant strategy

best choice for a firm regardless of the rival’s decision

Nash equilibrium

outcome where neither firm wants to change strategy because doing so makes them worse off