Microeconomics-Imperfect & Perfect Competition - Test4

The deadweight loss caused by a monopoly is similar to

the deadweight loss caused by a tax.

A perfectly competitive market Consequences

The actions of any single firm has a negligible impact on the market price. Individual firms take the market price as given. Firms in competitive markets are said to be price takers.

Exit refers to

a long-run decision to leave the market

A shutdown refers to

a short-run decision not to produce anything during a specific period of time because of current market conditions

Total revenue for a firm is the selling price times the quantity sold.

TR = (P x Q)

A perfectly competitive market has the following characteristics

1) many buyers and sellers in the market. 2) goods offered by the various sellers are largely the same. 3) firms can freely enter or exit the market

monopolist's marginal revenue

A monopolist's marginal revenue is always less than the price of its good. The demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.

monopoly profit maximization

A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. It then uses the demand curve to find the price that will induce consumers to buy that quantity.

Equilibrium for an Oligopoly - 2

As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level

Tendencies of Oligopoly

Collusion The two firms may agree on the quantity to produce and the price to charge. Cartel The two firms may join together and act in unison.

In the long run

At the end of the process of entry and exit, firms that remain must be making zero economic profit The process of entry & exit ends only when price and average total cost are driven to equality. In the zero-profit equilibrium, the firm's revenue compensates the owners for the time and money they expend to keep the business going. Long-run equilibrium must have firms operating at their efficient scale.

Average revenue equals the price of the good.

Average revenue = Total revenue/Quantity = (Price Quantity)/Quantity = Price

Short-run economic losses encourage firms to exit the market

Decreases the number of products offered. Increases demand faced by the remaining firms. Shifts the remaining firms' demand curves to the right. Increases the remaining firms' profits

Characteristics of Oligopoly

Few sellers offering similar or identical products Interdependent firms Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost.

In the short run

For any given price, each firm supplies a quantity of output so that its marginal cost equals price. The market supply curve reflects the individual firms' marginal cost curves

There is no excess capacity in perfect competition in the long run

Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm.

There is excess capacity in monopolistic competition in the long run

In monopolistic competition, output is less than the efficient scale of perfect competition.

Short-run economic profits encourage new firms to enter the market

Increases the number of products offered. Reduces demand faced by firms already in the market. Incumbent firms' demand curves shift to the left. Demand for the incumbent firms' products fall, and their profits decline

Competitive Firm

Is one of many producers Has a horizontal demand curve Is a price taker Sells as much or as little at same price

Monopoly

Is the sole producer Has a downward-sloping demand curve Is a price maker Reduces price to increase sales

For competitive firms, marginal revenue equals the price of the good.

MR = AR = P

Marginal revenue is the change in total revenue from an additional unit sold

MR =changeTR/cangeQ

Monopolistic Competition

Many firms selling similar products (but not identical)

Characteristics of Monopolistic Competition

Many sellers, Product differentiation and Free entry and exit

Four Types of Market Structure

Monopoly, Oligopoly, Monopolistic Competition and Perfect Competition

Oligopoly

Only a few sellers Differentiated Oligopolies selling similar but distinct goods ................ex. Cars Pure Oligopoly selling the same good ................ex. Steel

Monopoly

Only one seller of a unique good or service

Barriers to entry have three sources

Ownership of a key resource. • The government gives a single firm the exclusive right to produce some good....usually by recognizing its copyright or patent • Costs of production make a single producer more efficient than a large number of producers....this is called economies of scale...giving rise to a natural monopoly

For a competitive firm, price equals marginal cost.

P = MR = MC

For a monopoly firm, price exceeds marginal cost

P > MR = MC

Profit equals total revenue minus total costs

Profit = TR - TC Profit = (TR/Q - TC/Q) x Q Profit = (P - ATC) x Q

The firm shuts down if the revenue it gets from producing is less than the variable cost of production

Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC

Because a monopoly sets its price above marginal cost, it places a wedge between the consumer's willingness to pay and the producer's cost.

This is often called the Deadweight Loss or Excess Burden

A Monopoly's Revenue and Profit

Total Revenue P x Q = TR • Average Revenue TR/Q = AR = P • Marginal Revenue TR/Q = MR

Profit is maximized

When MR > MC .....increase Q When MR < MC .....decrease Q When MR = MC Profit is maximized.

Equilibrium for an Oligopoly - 1

When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).

Defenders argue that

advertising provides information to consumers. They also argue that advertising increases competition by offering a greater variety of products and prices. The willingness of a firm to spend advertising dollars can be a signal to consumers about the quality of the product being offered.

The fundamental cause of monopoly is

barriers to entry

Critics argue that brand names cause

consumers to perceive differences that do not really exist.

This means that the firm will want to produce the quantity that maximizes the

difference between total revenue and total cost

Product differentiation

each firm produces a product that is at least slightly different from those of other firms - each firm faces a downwardsloping demand curve.

Costs of production make a single producer more efficient than a large number of producer, this is called

economies of scale...giving rise to a natural monopoly

There are two noteworthy differences between monopolistic and perfect competition.

excess capacity and markup

Critics of advertising argue that

firms advertise in order to manipulate people's tastes. They also argue that it impedes competition by exaggerating product differentiation

Free entry and exit

firms can enter or exit the market without restriction.

A firm is considered a monopoly if

it is the sole seller of its product. its product does not have close substitutes

Many sellers

many firms competing for the same group of customers. examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc.

monopoly charges a price above the

marginal cost

The goal of a competitive firm is to

maximize profit

Economists have argued that brand names

may be a useful way for consumers to ensure that the goods they are buying are of high quality. providing information about quality. giving firms incentive to maintain high quality.

Profit maximization

occurs at the quantity where marginal revenue equals marginal cost.

For a competitive firm

price equals marginal cost

For a monopolistically competitive firm

price exceeds marginal cost

The firm maximizes profit by

producing the quantity at which marginal cost equals marginal revenue

Because price exceeds marginal cost, an extra unit sold at the posted price means more

profit for the monopolistically competitive firm