Study Guide Chapter 9: Perfect Competition Characteristics o Three requirements for perfectly competitive markets: 1. 2. 3. o A perfectly competitive firm is a price-_________ This means: Where do they get this price? Draw a graph to help explain. o Draw a graph for this a perfectly competitive firm, label curves. Elasticity of demand = Increase in price above Marginal Revenue curve will lose what percentage of customers? Short Run Profit Maximization o How is quantity determined for optimal quantity? o How is price determined for optimal quantity? When economists make the graph for the industry, how do they find the quantity of the industry? (where arrow is) Short Run Profit Maximization Continued o What are the three steps for finding max profit? Step 1: Step 2: Step 3: o What is the profit equation? o What is the maximum profit equation? Minimizing Short Run Losses o Negative profits can be found when P______ o When should firms shut down? o What is predatory pricing? o Why may a firm predatory price? Supply Curve of Perfectly Competitive Market o Where is the supply curve in the perfectly competitive market? o Draw this in a way that helps you remember. Long-Run Perfect Competition o Which requirement to be perfectly competitive does not hold in the long run? o Why is this? What would this lead to in the long run (what profit)? o Where are economic profits at zero? When price is driven down to the__________ o If short run profits are negative (P<ATC), firms would _________ the market o If short run profits are positive (P>ATV), firms would __________ the market Conclusion o If consumers value another unit of a good by more than it costs society to produce, then it will be produced. o What is the cost of society of producing another unit of output? o Is government interference required? Government Interference examples: (add your own examples) Externalities in consumption or production Public goods Imperfect Information among buyers Insuring against macroeconomic risks Normative concerns about an equitable distribution of goods and services Chapter 10: Monopolies Definition of Monopoly o Pure monopoly – Barriers to entry that allow monopolies to develop 1. What causes natural monopolies? – What is economies of scale? – What causes the lower costs? What is the ATC curve of a natural monopoly? 2. 3. 4. Draw a Graph for a Monopoly and Label Demand Curve of Monopoly o If a supplier of a perfectly competitive firm increases output, the price will ____________________ o If a supplier of a monopoly increases output, the price will _____________ o Is it possible that the monopoly may gain higher revenue by decreasing price? Maximum Profit o What are the three steps for finding max profit? Step 1: Step 2: Step 3: o What is the general profit equation? o What is the maximum profit equation? Losses o A monopoly will suffer losses if: o This tells us, that monopolies’ profits primarily depend on its __________ Objections to Monopolies o Two main inefficiencies: 1. Do perfectly competitive firms work this way? 2. P>MC There is place on the monopolist’s curve that exemplifies this, please draw this and explain in your own words. What is this called? Please label the loss to consumer surplus and the loss to producer surplus. o What is consumer surplus? Price Discrimination o What is it? o If we charge each consumer the highest price the each individual is willing to pay, this would be: o Three problems with price discrimination that make it difficult 1. 2. 3. o Perfect price discrimination gets rid of the ____________________ and sets price where marginal cost hits the _______________. o Now the Marginal Revenue = Chapter 11: Imperfect Competition Monopolistic Competition Characteristics o Three characteristics 1. 2. 3. o Reasons for differentiated product 1. 2. 3. o Can the firm change the price without losing all of its customers? o Why is this? o What does the demand curve look like? o Is the firm producing where the average total cost is at its minimum value? Draw a long run monopolistic competition graph and label. Cartels come from Monopolistic Competition o Cartels begin as ________________ markets and acts as ____________________ Cartels want the _____________ profits and ________ them amongst themselves. o How does the cartel find the quantity that they would like to set? o What does a cartel gain by setting the quantity at this price? o What is another word for what cartels do (all of above)? o Draw the graph of a cartel and label. Problems with Cartels 1. 2. o What is a “cheater” in the cartel? o What is a free rider? Oligopoly Market dominated by _______ firms Because there is such close competition, there is rarely a demand curve that works for each firm. The “__________ theory” is used in oligopolies “Nash Equilibrium” o What is the Nash Equilibrium? o Is every competitor necessarily happy at Nash Equilibrium? o What is the dominant strategy? (Regardless of other person, firm would be better off doing this.) o How could the firm collude? How is this colluding? o What is the problem though? What is each firm actually likely to do even if they do collude? o What is Nash Equilibrium in this case? Why?