AP Micro - Unit 4

1 firm that dominates the industry and sells a unique poduct

Type of market with a few large firms that dominate the industry

Large number of sellers that offer differentiated products

• Fewer, large firms

• Firms are price makers

• High barriers to entry

• Firms earn long run profits (except monopolisitc compeition, which break even in the long run)

• Products that are sold are differentiated

• Firms are inefficient in the long run

• Demand is GREATER than marginal revenue

Firms have some of total control over the price at which they choose to sell their goods in the market

Profit maximizing point, MR = MC

Companies use tools like advertising to promote their products

Due to the lack of competition, the firms do not feel pressure to produce at efficient levels

In order to sell another unit, the firm must lower the price of the next unit

A firm is the only one in the area that offers a particular product

They issue patents and other protections to ensure one firm has exclusive rights to manufacture a product

Ability of a firm to use it’s brand name and reputation to maintain their costumer base, making it difficult for new firms to enter and compete

Ability of a firm to mass produce their goods at low costs. Since new firms have higher start up costs, they have difficulty competing in the industry.

New firms may not have the financial resources to incur the upfront costs of entering the market, thus difficulty competing in the industry (ex: a company wanting to enter an airline needs to buy airplanes and maintain them)

• One large firm

• Firms are price makers

• High barriers to entry

• Firms earn long run profits

• Products sold are unique

• Non price compeition

• Inefficient

Occurs when an individual firm comes to dominate an industry by producing goods and services at the lowest possible production cost.

Yes; charge low prices and promote productive efficiency

Monopolies can’t price discriminate

The difference between ATC and demand at the profit maximizing output point

Between ATC and demand, occurs when ATC is BELOW demand

Difference between ATC and demand at profit maximizing quantity

Found between ATC and demand, where the ATC is ABOVE the demand

D = MC; no, price ceilings are here to force monopolies to produce here

Where P = ATC (not the same as the productively efficient point of P = minimum ATC)

Located where MR = 0, used to determine elastic and inelastic parts of the demand curve

Located where MR = 0, where that X value crosses the demand line

Section of demand curve above the unit elastic point

Section of demand curve below the unit elastic point

Yes

No, they will not willingly produce here because it will lower their profits

Monopolist charges only one price - the demand price at the point where MR = MC

Triangle at profit maximizing point to top of the demand curve;

Triangle found at profit maximizing point and bottom of the MC curve

Anything to the right of the profit maximizing point, up until the demand curve and marginal cost

• Firm must have monopoly power

• Firm must be able to segregate the market - be able to find out what each consumer’s willingness to pay is

• Consumers cannot easily resell the product

Pure: D > MR

Price discriminating: D = MR

Pure: Productively and allocatively INefficient

Price discriminating: Allocatively efficient, productively inefficient

Pure: smaller long run economic profits

Price discriminating: larger long run economic profits

Pure: some consumer surplus

Price discriminating: Zero consumer surplus

Trapezoid found using where the MC = D/MR, and the corresponding ATC value

• Many, various sized firms

• Firms are “price makers”

• Low barriers to entry

• Firms break even in the long run

• Differentiated products sold

• Non-price competition

• Inefficient both allocatively and productively

• Experience excess capacity

The economies of scale section of the ATC (downward sloping part) will line up with the corresponding profit maximizing value

Other firms are compelled to enter, resulting in less market share for the existing firms. Demand and MR shift LEFT together.

Firms are compelled to exit, leading in more market share for the remaining firms. Demand and MR shift RIGHT together

Price = MC

Price = minimum ATC

Difference between a firm’s current inefficient level or production and the productively efficient level of output.

• Few, large firms

• Price makers

• High barriers to entry

• Firms earn long run profits

• Differentiated products sold with many close substitutes

• Non-price competition

• Firms are inefficient

Firms communicate with each other and act as one unit, also known as cartels

Firms compete and do not work together, practice price leadership

Strategy that a firm should take no matter what the other firm does

No players can unilaterally improve their position - they cannot improve unless the other player moves, but the other player also can’t move unless the first player does, etc.

The dominant firm will initiate a price change in the industry

More elastic demand for your product (consumers become price sensitive)

Your competitor will match your price and the market will stay relatively similar, with a relatively inelastic demand curve

If your price increase is above equilibrium price, it’s on elastic section of graph

If your price decrease is below equilibrium price, it’s on inelastic section of graph