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?