ECON 2106 1st EditionFinal Exam Study GuideCh. 14 – Firms in Competitive Markets- Difference in market structure shapes the pricing and production decisions of thefirms that operate in these markets- A market is competitive if each buyer and seller is small in comparison to the size of the market and, therefore, has little ability to influence market price- If a firm can influence the market price of the good it sells, it is said to have market power- Competitive market (sometimes called a perfectly competitive market) has 2 characteristics:1. Many buyers and sellers in the market2. Goods offered by the various sellers are largely the samea. Each buyer and seller takes the market price as given3. (Sometimes as a characteristic) Firms can freely enter or exit the marketa. This is a powerful force shaping the long run equilibrium- Total revenue = Price x Quantityo Because price is the same, total revenue is proportional to the amount of output- Average revenue: total revenue divided by quantity soldo For all firms, average revenue is equal to the price of the good- Marginal revenue: the change in total revenue from an additional unit soldo For competitive firms, marginal revenue equals the price of the good- If marginal revenue is greater than marginal cost then production should be increased; if marginal revenue is less than marginal cost then production should be decreased - Cost curves:o Marginal cost (MC) = upward slopingo Average Total Cost (ATC) = u-shapedo Price (P) = horizontal  Because competitive market firms are price takers- 3 General Rules for Profit Maximization: 1. MR > MC  increase output2. MR < MC  decrease output3. MR = MC  profit maximization level of output- The marginal cost curve is also the competitive firm’s supply curve- An increase in the price will lead to an increase in production- Shutdown: a short-term decision not to produce anything during a specific period of time because of current market conditions- Exit: a long term decision to leave the market- Sunk Cost: cost you have to pay even if you shutdown o It has been committed and cannot be recoveredo Farmer pays for land even if he does not grow crops on them- A firm will shut down if the revenue that it would earn from producing is less than its variable costs of production- A firm will exit the market if the revenue it would get from producing is less than its total costso TR < TC or P < ATC- Profit = (P – ATC) x Q- At the end of this process of entry and exit, firms that remain in the market must be making zero economic profito The process of entry and exit ends only when price and average total cost are driven t equality- The long-run supply curve is typically more elastic than the short-run supply curveCh. 15 – Monopoly- A monopoly firm is a price maker- The outcome in a market with a monopoly is often not in the best interest of society- Monopoly: a firm that is the sole seller of a product without close substituteso Ex. Microsoft- Barrier entries are what stop other people/firms from entering that market…there are 3 main sources of barriers:1. Monopoly resources: a key resource required for production is owned by a single firm2. Government regulation: the government gives a single firm the exclusive right to produce some good or service3. The production process: a single firm can produce output at a lower cost than can a larger number of producers- Patent and copyright laws are types of government regulation that allow monopolies to existo There are benefits and costs- Natural monopoly: a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms- A competitive firm’s demand curve is horizontal because they’re price takers but a monopoly firm’s demand curve is downward sloping because it is just like the market demand curve since they are the only one in the market- A monopolist’s marginal revenue is always less than the price of its good- When a monopoly increases the amount it sells, this action has two effects on total revenue (PxQ):1. The output effect: more output is sold, so Q is higher, which tends to increase total revenue2. The price effect: the price falls, so P is lower, which tends to decrease total revenue- For monopolies, the demand curve is the same as the average revenue curve since the firm’s price equals the average revenue- Marginal-revenue curve lies below the demand curve- The monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curveo Qmax  marginal revenue = marginal cost- In competitive markets, price equals marginal cost- In monopolized markets, price exceeds marginal cost- For a monopoly:Profit = (P – ATC) x Q- The socially efficient quantity is found where the demand curve and the marginal-cost curve intersect - At optimal quantity, the value of an extra unit to consumers exactly equals the marginal cost of productiono The monopolist produces less than the socially efficient quantity of output- The area of the deadweight loss triangle between the demand curve and the marginal cost curve equals the total surplus lost because of monopoly pricing- The monopoly profit represents a bigger slice for producers and a smaller slice for consumers but does not represent a reduction in the entire economic pie- Price Discrimination: the business practice of selling the same good at different prices to different customers- 3 Price Discrimination Lessons1. It is a rational strategy for profit maximizing monopolists2. It requires the ability to separate customers according to their willingness to pay3. It can raise economic welfare- Perfect Price Discrimination: a situation in which the monopolist knows exactly each customer’s willingness to pay and can charge each customer a different price- Examples of Price Discrimination:o Movie ticketso Airline priceso Discount Couponso Financial Aido Quantity DiscountsCh. 16 – Monopolistic Competition- Imperfect Competition = the situation between perfect competition and monopoly 1. Oligopoly: a market structure in which only a few sellers offer similar or identical products2. Monopolistic Competition: a market structure in which many firms sell products that are similar but not identical o Describes a market with these attributes: Many sellers Product differentiation Free entry and exit- The monopolistically competitive firm