AP Microeconomics Unit 4

that's just a theory

What are the 4 basic market structures in order from most competitive to least competitive?

Perfect competition, monopolistic competition, oligopoly, monopoly

Monopolies are price _______

makers

How many firms in a monopoly market?

1

There are _________ barriers to entry in a monopoly market

highI

In the SR and LR, monopolies make __________ economic profits

positive

What is a natural monopoly?

A monopoly that produces the socially optimal quantity of a good at the lowest cost possible → one firm producing best option for society

What are some examples of a natural monopoly?

Utility/power lines, sewage system, etc

What is price discrimination?

When a different price is charged for each consumer

Why is price discrimination done?

To increase overall revenue and profits, maxing out PS and minimizing (or removing) CS

Why does D = MR in a price discrimination market?

Firms don’t need to adjust their prices to sell more products

Monopolistically competitive markets have a _________________ number of firms

relatively large

Monopolistically competitive firm produce _________________ products

differentiated

Monopolistically competitive firms must ______________ in order to get consumers to purchase their product

advertise

Monopolistic competition has ___________ barriers to entry

low

Monopolistically competitive firms are price ____________

makers

How does the monopolistically competitive graph differ from the monopoly graph?

D and MR are more elasticH

What kind of profits do monopolistically competitive firms make in the long run (when producing at MR = MC) and why?

Zero, because other firms are easily able to enter/exit the market, impacting demand

How does the SR monopolistically competitive graph differ from the LR?

In the LR, ATC is tangent to demand at price, indicating zero economic profits

What is the allocatively efficient point on a graph?

D = MCWh

What is the productively efficient point on a graph?

Lowest point of ATC

Oligopoly markets have a _________ number of firms

small

Oligopolies are price ________

makers

Oligopolies have _________ barriers to entry

high

What is mutual interdependence?

When firms take the price decisions of their rivals into account, considering how their rivals will react before making a decision

What is game theory?

The study of how people/firms behave in strategic situations

What is a firm’s dominant strategy?

When a firm is better off no matter what their competitor does

What is the Nash Equilibrium?

When the dominant strategies of two competing firms are the same → optimal outcome that will occur when both firms make decisions using what they know about the other firm

What is meant by saying that Oligopolies collude with one another?

When firms work together to fix prices at a high level to benefit each other, generating more profit

What is a cartel?

Groups of producers that collude, creating an agreement to fix prices at a high level to maximize profit for them all, producing an identical product

A colluding oligopoly’s graph looks like a ___________ because…

monopoly; the firms produce an identical product

What happens to price when the elasticity of the kinked demand curve changes on the graph of a non-colluding oligopoly?

Price = “sticky” → P and Q don’t change if MC moves up or down vertically

When MR goes negative, TR is _______

maximized

MC essentially = the __________ curve

supply

What is the break even point?

Price or Demand = ATC

Firms in monopolistic competition act ______________ in setting price and output while firms in oligopoly are ______________ in setting price and output

independent; interdependent

Firms in an imperfectly competitive market face a ____________-sloping demand curve. Therefore, to sell a larger quantity, firms must _________ their prices on all the units they sell

downward; reduce

The degree of elasticity depends on the number of _________ and the degree of product _____________

competitors; differentiation

When MR is positive, a positive change in P results in a __________ of TR, and a negative change in P results in a ________ of TR

increase; increase

When MR is negative, a positive change in P results in a ________ of TR, and a negative change in P results in a _______ of TR

increase; decrease