final 5Setting Prices When You Have Market Power

These flashcards cover key concepts and definitions related to setting prices when a firm has market power.

What is the main trade-off when setting prices for your product?

Selling a larger quantity at a lower price vs. selling fewer items at a higher price.

Define a firm demand curve.

It shows how the quantity demanded from your specific firm changes as price changes.

How does market power affect the firm demand curve?

More market power → steeper (inelastic) curve; less market power → flatter (elastic) curve.

How do companies experimentally determine their firm demand curve?

By charging different prices to customers, locations, or times and observing quantity demanded.

In Sofia’s example, what quantity is sold at $23,000, $22,000, and $21,000?

$23,000 → 2 cars; $22,000 → 3 cars; $21,000 → 4 cars.

What is marginal revenue (MR)?

The additional revenue from selling one more unit: MR = change in total revenue from selling one more unit.

Explain the output effect in marginal revenue.

Revenue gained from selling one extra unit at the current price (P).

Explain the discount effect in marginal revenue.

Revenue lost because the price must be lowered on all units to sell one additional unit (ΔP × Q).

How does marginal revenue relate to the firm demand curve?

MR lies below the demand curve and declines faster due to the discount effect.

Describe the Rational Rule for Sellers.

Sell additional units as long as MR ≥ MC; stop where MR = MC.

In Sofia’s Chevy dealership example, what happens to total revenue when the price drops from $23,000 to $22,000?

TR increases: $23,000 × 2 = $46,000; $22,000 × 3 = $66,000.

How do you calculate marginal revenue from Sofia’s data?

MR = change in total revenue ÷ change in quantity sold. Example: MR = $66,000 − $46,000 = $20,000.

What is the “discount effect” in marginal revenue?

Loss in revenue from lowering the price on all previous units to sell one more unit.

Why does marginal revenue always lie below the demand curve in imperfectly competitive markets?

Because lowering the price to sell more reduces revenue per unit; MR < price.

What is the difference between a firm demand curve and a market demand curve?

Firm demand curve = quantity demanded from your firm. Market demand curve = total quantity demanded across all firms.

What happens to marginal revenue if the firm sells a very large quantity?

MR declines faster because the discount effect (ΔP × Q) increases with quantity.

How do firms with limited market power differ from monopolists in pricing?

They can raise prices without losing all customers but still face competitors, so sales decrease with price increases.

What are the two steps to set prices with market power?

1) Set quantity where MR = MC. 2) Look up to the demand curve to find price.

How much profit does Sofia earn if she follows the Rational Rule for Sellers?

Profit = (22,000 × 3) − (20,000 × 3) = $6,000 per week.

Why does the market outcome with market power not maximize total economic surplus?

Firms restrict quantity below the socially optimal level where P = MC, leaving potential consumer and societal gains unrealized.