Unit 4
Concepts you need to know and be able to use for the exam
Characteristics and definitions of the four market structures
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
How a firm in perfect competition determines profit maximization point
Shut down rule
Moving from short run to long run in perfect competition
Changes in market demand and supply and their effect on an individual firm's price and output
Economic vs. accounting profit
Sources of monopoly power (barriers to entry)
Price elasticity on a monopoly demand curve
Demand and marginal revenue in monopoly
MR and price in monopoly
How a monopoly maximizes profit
Consumer and producer surplus and monopoly
deadweight loss
Monopoly and allocative and productive efficiency
Moving from short run to long run in monopolistic competition
Excess capacity in monopolistic competition and how to show it on a graph
Non-price competition and oligopoly
Measuring market concentration
Cartels and collusion
Game theory and oligopoly
Effect of advertising on monopolist competition and oligopoly
Price discrimination and its effect on consumer and producer surplus as well as quantity and profit
Graphing
Perfect competition in long-run equilibrium, including ATC, AVC, MC, MR, demand, and price
Monopoly in long-run equilibrium, including ATC, AVC, MC, MR, demand, and price
Consumer and producer surplus for perfect competition and monopoly and deadweight loss
Monopolistic competition in long-run equilibrium and excess capacity
Collusion in oligopoly
Two items that are important but not covered well in the textbook:
1. "Oligopolists are characterized by mutual interdependence. If the oligopolist raises its price, rivals will
not follow and will therefore gain market share. If the oligopolist lowers its price, rivals will have to
lower their prices in order to keep from losing market share. Therefore, the oligopolist often prefers
nonprice competition as a safer way of competition." - John Morton, Council for Economic Education
2. Two kinds of efficiency. The textbook indicates that the basic condition for economic efficiency is that
"the price system must confront decision makers with all the costs and all the benefits of their choices."
In other words, efficiency requires that consumers confront prices that equal marginal costs. However,
it's important to further distinguish two types of efficiency: productive and allocative. Productive
efficiency is interested in producing goods at the lowest possible cost. Allocative efficiency refers to
producing the goods and services that society wants. The test is that productive efficiency is obtained
where price = minimum ATC and allocative efficiency where price = MC. Only perfect competition meets
both criteria.