Microeconomics: Market Structures
Monopoly (definition)
The only firm in an industry. It retains this status because there are barriers to entry. The products that it produces have no substitutes, and therefore the firm has significant market power. With this power, the firm can control its output to seek the profit maximizing price.
The Shut-Down Rule
The output and price at which the firm just covers its total variable cost. In the short-run, the firm is indifferent between producing the profit-maximizing output and shutting down temporarily.
Imperfectly competitive firms face...
a downward sloping demand curve, with a MR curve that is inside the demand curve.
Oligopoly
There are a few dominant firms dealing with a product that is either homogeneous or differentiated. They have interdependence, and are concerned with each other's cost structures, advertising to gain market share, pricing, etc.
Monopolies and Oligarchies have barriers to entry, caused by
a) Patents and copyrights b) Other legal restrictions c) Control of a key resource d) High start-up costs
The monopolist...
a) can have long-run economic profits b) will always produce less and charge more for a product. They are able to set Price above Marginal Cost of Production. c) has a profit maximizing output determined by the MR=MC rule d) in the long run will not necessarily : -have productive efficiency, have allocative efficiency, have the fair market price. e) an unregulated monopoly will create a deadweight loss.
Monopolistically Competitive Firms....
a) have some leeways with regard to pricing. As price searchers, firms can differentiate their product's result in a price that is higher than marginal cost b) have long-run profits. They are the only type of imperfect competitor that can sustain long-run economic profits. c) in the long-run will have an ATC curve that is tangent to the demand curve at the profit maximizing level of output. Therefore, AR will equal equal average cost and there will be no economic profit d) will have an output that doesn't reach the minimum average cost level, so firms will not be producing efficiently. e) will have a price that is higher than marginal cost, so firms are not allocatively efficient f) have an elastic demand curve, but the degree of elasticity depends on the # of competitors and the amount of product differentiation.
A firm must have market power in order to price discriminate. In addition:
a) it must be able to identify two or more groups of consumers with different demand curves (the elasticity of demand differs for each group) b)it must be able to prevent one group from being able to resell the product to the other group.
Some characteristics of a perfect competitive industry are:
a) perfect competitors will not achieve long-run profits. They may experience profits(or loss) in the short-run, but the industry adjusts because its so easy to enter and exit. b) price will always equal marginal revenue, and the average revenue. In the long-run, the MR curve will interest the MC curve at the minimum of the ATC curve. Consequently, when ATC equals MR there are no economic profits. When ATC is at its minimum, there's productive efficiency. When Price=MC there's allocative efficiency.
Cartel
An organization of different companies working together in order to maximize profit for each other. This is illegal in the US. An example of a cartel is OPEC.
The four types of market stuctures
1. Perfect Competition and within the area of Imperfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligarchy
Game Theory
Explains the predicament of decision making for an oligopoly. Game theory analyzes the strategic moves firms make in their decisions about pricing, output levels, advertising, etc
Break-Even Quantity (Formula)
Fixed Cost/Contribution per unit
Socially Optimal Amount
MC=Price
Monopolistic Competition
Many competing firms deal with a somewhat differentiated product. This somewhat differentiated product can be of benefit to consumers because it provides them with a greater selection. Monopolistically competitive firms engage in advertising as a form of non-price competition. There is ease of entry or exit in the market.
Contribution per Unit (Formula)
Price-AVC
Market Power
The ability to influence the price of a product. Since a perfect competitor has no influence over the price of a product, it can only sell its units at the industry price.
Some characteristics of oligopolies are....
a) there are barriers to entry b) an oligopoly does have pricing power, but it must be conscientious of the effects on competitors. c) an oligopoly can achieve long-run economic profits d) an oligopolistic firm will usually not produce at the productively efficient level of output. e) price will greater than MC. The firm will not be allocatively effecient.
Natural Monopoly
an industry where there's not enough demand for a product for even one firm to produce and reach the lowest average cost. Therefore it is economically impractical to have competitors in the given industry.
In a perfectly competitive industry many firms sell...
one homogeneous product. Because there are few barriers in this type of industry, firms enter and exit easily , and since industry supply and demand determine what price will prevail, firms are price takers.
The output that the firm will produce is determined by...
the golden rule of profit maximization; as long as AR is above AVC, the MR=MC. Simplified, to maximize profits, the firm should produce where MR=MC.
The break-even point (Definition)
the quantity of output that produces neither economic profit nor economic loss
A imperfectly competitive firm's goal is to maximize
total cost. NOT total revenue.
Price Discrimination
when a firm charge different prices to different consumers, even thought the product and transaction costs are the same. In this case, the MR curve and demand curve would be the same.
