AP Microeconomics Unit 4

Monopoly Characteristics

Firm = market

Unique product w/ no substitutes

High barriers to entry

Monopolies set the price

Overprice & underproduce

Are not allocatively(P=MC) or productively(ATC min.) efficient

Monopolies decrease CS and increase PS

3 Types of Monopoly Barriers to Entry

High fixed/start-up costs

Geography or Ownership of Raw Materials

Legal Barriers

Oligopoly Characteristics

Few large producers

Identical or differentiated products

High barriers to entry

Oligopolies have full control over price

Mutual Interdependence (must worry abt each other)

Monopolistics Competition

Large number of sellers

Differentiated products

Some control over price

Low barriers to entry

Non-price competition (like advertising)

Monopoly Graphs

MR is less than Demand

MR=MC profit maximizing still applies

Cost curves are the same

Monopolies do not have supply curves

CS is the triangle above the price line, PS is above MC below P

Total Revenue Test

If prices falls slightly and…

-TR increases → elastic
-TR decreases → inelastic
-TR stays the same → unit elastic

Use % change in quantity / % change in price

Natural Monopoly

When it is natural for only one firm to produce since they can produce at the lowest cost

Natural Monopoly Graphs

Downward sloping ATC for the entire duration and always above MC

Demand and MR are still the same downward sloping

Monopolies at the Socially Optimal Quantity

Where Demand (P) = MC, however this means an economic less

To offset, governments will either:
1. Provide lump sum subsidies
2. Implement a price ceiling where profit is zero (ATC)

Price Discrimination

Tries to charge consumers what they are each willing to pay, in order to increase profits

Conditions for Price Discrimination

1. Must have monopoly power (price-maker)

   1. Must be able to segregate (differentiate) the market

Price Discriminating Monopoly Graph

Demand = MR

No DWL, no consumer surplus

More profit and higher socially optimal quantity than non price discriminating

Monopolistic Graphs

D greater than MR

Not efficient

Still MR=MC is profit maximizing

in the short run, same as a monopoly graph.

Examples of Non-Price Comopetition

Location, product attributes, packaging and advertising

Goal is to increase demand and make it more inelastic

Monopolistic Competition in the Long Run

If profit is being made, firms will enter, driving down demand

Long Run Equilibrium: Where MR=MC up to P=ATC

Not allocatively or productively efficient

Excess Capacity

Horizontal gap between the profit-maximizing (MR=MC) output and the minimum ATC output

Firms would produce at a lower cost with minimum ATC, but hold back production to maximize profit

Game Theory

How people (oligopolies) should behave in strategic situations

Dominant Strategy

The move that is better in both scenarios than the other move (regardless of what the opponent does)

If a firm has a dominant strategy, they should always go with that

Nash Equilibrium

When both firms have made the choice that would be best in each scenario, and have no incentive to change it