AP Econ Unit 4 Vocab

Monopoly

a single seller of a good

• no close substitutes

• high barriers to entry

is essentially the market

Market Power

the ability to set a price above the marginal cost

• a monopolist is a price-maker not a price-taker

MR < P

• MR always lies below the demand

• selling one more unit cuts prices on all units

Profit-Max Rule

All firms → produce where MR = MC

Monopoly vs. Competition

Monopoly:

• higher P

• lower Q

• dead-weight loss

Perfect Competition:

• P = MC

• allocatively efficient

Dead-weight loss

• the triangle between D and MC → from Q_m to Q_c

• represents mutually beneficial trades that don’t happen under monopoly

No supply curve

• a monopolist has no supply curve

Barriers to Entry

• patents

• licenses

• control of resources

• economies of scale

• network effects

Natural Monopoly

one firm can supply the market at lower ATC than two or more times

• economies of scale over the entire range

P = ATC

• firm earns zero economic profit

• not allocatively efficient

• average cost pricing

P = MC Regulation

• eliminates dead-weight loss → allocatively efficient

• if MC < ATC → loss and requires subsidy

The regulatory dilemma

• P = MC is efficient

• could cause bankruptcy

• P = ATC → doesn’t fully eliminate DWL

Unregulated outcome

standard monopoly

• MR = MC

• price on D curve

• economic profit

• lowest output

• highest price

• largest DWL

Price Discrimination

selling the same good at different prices to different buyers

• price differences aren’t justified by costs

Price Discrimination → three conditions

• market power

• ability to segment customers by willingness to pay

• ability to prevent resale

Price Discrimination Purpose

• capture consumer surplus

• convert to producer surplus (profit)

Perfect Price Discrimination

• charge each buyer their willingness to pay

• eliminates all DWL and consumer surplus

Price Discrimination Effect on Output

• increases output vs single price monopoly

• more customers are served at different prices

Price Discrimination Examples

• airline tickets

• student/senior discounts

• coupons

• early bird specials

• financial aid

• software tiers

Oligopoly

a few large firms dominate the market

• high barriers to entry

• products may be identical or differentiated

Oligopoly Interdependence

each firm must consider how rivals will react to

• pricing

• output

• and advertising decisions

Collusion and Cartels

• firms cooperate to act like a monopoly

• a cartel is a formal collusion

• illegal under Sherman Act

Game Theory

framework for analyzing strategic interaction

• each players best move depends on others choices

Payoff Matrix

a table showing profits for each combination of strategies

Dominant Strategy

• yields the best playoff regardless of what the other player does

• NOT ALL GAMES HAVE ONE

Nash Equilibrium

• the outcome where no player can improve by unilaterally changing strategy

Prisoners Dilemma

both have a dominant strategy to defect

• explains cartel instability

Monopolistic Competition Definition

• many firms

• differentiated products

• free entry and exit

• each firm has a small degree of market power

Monopolistic Competition Product Differentiation

source of market power

• each firms demand is slightly downward sloping

Monopolistic Competition Short Run

• like a mini monopoly

• profit, break even, loss

• MR = MC

Monopolistic Competition Long-Run

• entry exit drive profit is 0

• P = ATC

Monopolistic Competition Excess Capacity

• firm can lower costs by producing more

• but that wouldn’t maximize profit

P > MC Always

• prices exceeds MC

• allocative inefficiency is the price of variety

Entry and Exit

• Profits → entry → D shifts left → profit

• Losses → exit → D shifts right → loss