Econ Section 11

___ is a market structure in which there are many competing firms, each producing a differentiated product, and there is free entry and exit in the long run. Product differentiation takes three main forms: by style or type, by location, and by quality. The extent of imperfect competition can be measured by the ____, or the ___.

Monopolistic competition; concentration ratio; Herfindahl-Hirschman Index

To persist, a monopoly must be protected by a ___. This can take the form of control of a natural resource or input, increasing returns to scale that give rise to a ___, technological superiority, or government rules that prevent entry by other firms, such as ___ or ___.

barrier to entry; natural monopoly; patents; copyrights

A firm is profitable if total revenue exceeds total cost or, equivalently, if the market price exceeds its ____-- minimum average total cost. If market price exceeds the break-even price, the firm is profitable. If market price is less than minimum average total cost, the firm is unprofitable. If market price is equal to mini- mum average total cost, the firm breaks even. When profitable, the firm's per-unit profit is P − ATC; when unprofitable, its per-unit loss is ATC − P.

break-even price

A monopoly creates ___ by charging a price above marginal cost: the loss in consumer surplus exceeds the monopolist's profit. This makes monopolies a source of market failure and governments often make policies to prevent or end them.

deadweight losses

There are ___ main types of market structure based on the number of firms in the industry and product differentiation: perfect competition, monopoly, oligopoly, and monopolistic competition.

four

The ___ depends on the time period (short run or long run). When the number of firms is fixed, the ____ applies. The ____ occurs where the short-run industry supply curve and the demand curve intersect.

industry supply curve; short-run industry supply curve; short-run market equilibrium

With sufficient time for entry into and exit from an industry, the ____ applies. The ___ occurs at the inter- section of the long-run industry supply curve and the demand curve. At this point, no producer has an incentive to enter or exit. The long-run industry supply curve is often horizontal. It may slope upward if there is limited supply of an input, resulting in increasing costs across the industry. It may even slope downward, as in the case of decreasing costs across the industry. But the long-run industry supply curve is always more elastic than the short-run industry supply curve.

long-run industry supply curve; long-run market equilibrium

In the ____ of a competitive industry, profit maximization leads each firm to produce at the same marginal cost, which is equal to the market price. Free entry and exit means that each firm earns zero economic profit—producing the output corresponding to its minimum average total cost. So the total cost of production of an industry's output is minimized. The outcome is efficient because every consumer with willingness to pay greater than or equal to marginal cost gets the good.

long-run market equilibrium

There are two necessary conditions for a perfectly competitive industry: there are many firms, none of which has a large ___, and the industry produces a ___ or ___—goods that consumers regard as equivalent. A third condition is often satisfied as well: ___ into and from the industry.

market share; standardized product; commodity; free entry and exit

Fixed cost matters over time. If the market price is below ___ for an extended period of time, firms will exit the industry in the long run. If market price is above minimum average total cost, existing firms are profitable and new firms will enter the industry in the long run.

minimum average total cost

The key difference between a monopoly and a perfectly competitive industry is that a single, perfectly competitive firm faces a horizontal demand curve but a ____ faces a downward-sloping demand curve. This gives the monopolist market power, the ability to raise the market price by reducing output.

monopolist

A ___ is a producer who is the sole supplier of a good without close substitutes. An industry controlled by a monopolist is a ___.

monopolist; monopoly

Many industries are ___-: there are only a few sellers. Oligopolies exist for more or less the same reasons that monopolies exist, but in weaker form. They are characterized by ___: firms compete but possess some market power.

oligopolies; imperfect competition

At the monopolist's profit-maximizing output level, marginal cost equals marginal revenue, which is less than market price. At the perfectly competitive firm's profit-maximizing output level, marginal cost equals the market price. So in comparison to ____, monopolies produce less, charge higher prices, and can earn profits in both the short run and the long run.

perfectly competitive industries

In a ____ all firms are price-taking firms and all consumers are ____—no one's actions can influence the market price. Consumers are normally price-takers, but firms often are not. In a ___, every firm in the industry is a price-taker.

perfectly competitive market; price-taking consumers; perfectly competitive industry

A producer chooses output according to the ______: produce the quantity at which price equals marginal cost. However, a firm that produces the optimal quantity may not be profitable.

price- taking firm's optimal output rule

Natural monopolies also cause deadweight losses. To limit these losses, governments sometimes impose ___ and at other times impose ____. A price ceiling on a monopolist, as opposed to a perfectly competitive industry, need not cause shortages and can increase total surplus.

public ownership; price regulation

Fixed cost is irrelevant to the firm's optimal short-run production decision. The short-run production deci- sion depends on the firm's ___—its mini- mum average variable cost—and the market price. When the market price is equal to or exceeds the shut-down price, the firm produces the output quantity at which marginal cost equals the market price. When the market price falls below the shut-down price, the firm ceases production in the short run. This generates the firm's ___.

shut-down price; short-run individual supply curve

Not all monopolists are ___. Monopolists, as well as oligopolists and monopolistic competitors, often engage in ___ to make higher profits, using various techniques to differentiate consumers based on their sensitivity to price and charging those with less elastic demand higher prices. A monopolist that achieves ___ charges each consumer a price equal to his or her willingness to pay and captures the total surplus in the market. Although perfect price discrimination creates no inefficiency, it is practically impossible to implement.

single-price monopolists; price discrimination; perfect price discrimination

The marginal revenue of a monopolist is composed of a quantity effect (____) and a price effect (____). Because of the price effect, a monopolist's marginal revenue is always less than the market price, and the marginal revenue curve lies below the demand curve.

the price received from the additional unit; the reduction in the price at which all units are sold