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Microeconomics Final Merged Slides

Chapter 12: Perfect Competition

Definition of Perfect Competition

Characteristics of Perfect Competition:

  • Many firms sell identical products to many buyers.

  • No restrictions to entry into the industry.

  • Established firms do not have advantages over new entrants.

  • Sellers and buyers have full information about prices.

Price Takers

In perfect competition, firms are price takers:

  • A price taker cannot influence the price of goods or services.

  • Each firm's output is a perfect substitute for others’, resulting in perfectly elastic demand.

Economic Profit and Revenue

Economic Profit:

  • Defined as the difference between total revenue and total cost.

  • Total cost includes opportunity costs and normal profit.

Total Revenue:

  • Calculated as Price (P) multiplied by Quantity (Q) ➔ TR = P × Q.

Marginal Revenue (MR):

  • Change in total revenue from selling one additional unit.

Market Price Determination

Market Demand and Supply:

  • Market price is set by the intersection of supply and demand.

Firm’s Decision-Making to Maximize Profit

Key Decisions:

  • How to produce at minimum cost.

  • What quantity to produce.

  • Whether to enter or exit the market.

Output Decision and Economic Profit

A firm maximizes economic profit when output is produced at the point where MR = MC (Marginal Cost).

Marginal Analysis:

  • Profits are maximized when increasing output marginally does not decrease total profit.

Temporary Shutdown Criteria

A firm facing economic loss must decide to:

  • Stay in the market and continue production or

  • Shut down temporarily to minimize losses.

Loss Comparisons and Shutdown Point

  • Loss = Total Fixed Cost (TFC) + Total Variable Cost (TVC) - Total Revenue (TR).

  • Shutdown Point:

    • The point where a firm is indifferent between producing and shutting down (occurs at the minimum Average Variable Cost (AVC)).

Firm’s Supply Curve

  • Supply curve relates to marginal cost, indicating the quantity supplied at various prices.

  • At prices below the shutdown point, firms will produce nothing.

Short-Run Market Dynamics

  • In the short run, market supply signifies how quantity supplied by all firms changes with price.

  • Short-Run Equilibrium:

    • Determined by the interaction of market supply and demand, setting price and output levels.

Profits and Losses

  • To evaluate a firm’s economic situation, compare average total cost at profit-maximizing output with the market price in the short run.

Long-Run Adjustments in Perfect Competition

Entry and Exit:

  • New firms enter in response to economic profits; firms exit in cases of economic losses until eventual profits reach zero.

Efficiency of Resource Utilization

  • Efficient use occurs when marginal social benefit equals marginal social cost.

Consumer and Producer Surplus:

  • Total surplus maximized in long-run competitive equilibrium when consumer surplus and producer surplus combine.

Chapter 13: Monopoly

Overview of Monopoly Market Structure

Monopoly Definition:

  • A market with one supplier of a good or service for which no close substitutes exist.

  • Barriers prevent the entry of new firms.

Features of Monopolies

  • No Close Substitutes: Dominant firms face no effective competition.

  • Barriers to Entry: Prevent new competitors from entering the market. Types include natural, ownership, and legal barriers.

Pricing Strategies under Monopoly

  • Single-Price Monopoly: Charges the same price for each unit sold.

  • Price Discrimination: Selling the same good at different prices to different consumers or for different units.

Monopoly vs. Perfect Competition

  • Price Setting: Monopolies face a downward-sloping demand curve, requiring price adjustments to affect output levels.

  • Economic Profit: Monopoly can maintain positive economic profits in the long run due to barriers to entry.

Antitrust Considerations

  • Regulations aim to prevent monopolistic practices and promote competitive markets.

Chapter 14: Monopolistic Competition

Market Structure Characteristics

Monopolistic Competition Definition:

  • Many firms sell differentiated products in a market that encourages entry and exit.

Product Differentiation

  • Firms focus on quality, price, and marketing to distinguish their products from competitors.

Long-Run Outcomes in Monopolistic Competition

  • Economic profits attract new entrants leading to zero economic profits in the long run.

Efficiency Implications

  • Monopolistic competition leads to excess capacity and price markup over marginal costs, implying inefficiency in resource allocation.

Chapter 15: Oligopoly

Definition and Characteristics

  • Oligopoly market structure features a few firms with significant market power, where strategic decision-making is common.

Game Theory and Strategic Decision-Making

  • Prisoner’s Dilemma: Illustrates the challenges of cooperation in competitive markets. Firms may resort to collusion to enhance profits but face legal restrictions.

Types of Oligopoly Games

  • Repeated Games: Permit mechanisms for sustaining cooperation over time, enhancing profitability for firms.

Antitrust Laws Against Collusion

  • Price fixing between firms violates antitrust laws and faces legal ramifications.