ECON 102 1st Edition Exam 3 Study Guide Competition in the Short Run Perfect competition Makes 3 important decisions What price to charge only charges market price Firm maximizes profits when they produce an output where marginal revenue marginal cost Profits TR TC Will shut down when the market price falls below the average variable cost Competition in the Long Run Long run time period in which all variables are variable Each new firm entering the market would increase supply and reduce the market price of a good New firms enter the market when prices are positive and exit when profits are negative Market prices change as firms enter and exit the market until economic prices are 0 in the long run Can be represented using the supply and demand curve Short Run To maximize profits produce at the point where marginal revenue marginal cost Long Run Market run shifts right and continues to fall until economic profits are eliminated The Long Run Supply Curve In the short run Upward sloping In the long run horizontal sloping constant cost industries meaning that costs do not change as more suppliers enter the industry There are Increasing Constant and decreasing cost industries Monopoly Market structure Four major categories based on 2 questions o How many sellers exist in the market and how unique is the product Perfectly competitive Monopolistic competition Oligopoly Monopoly In general a monopolist maximizes a profit by choosing an amount of output in which marginal revenue MR marginal cost MC With more sellers the price in the long run will lower Lower in competitive markets than monopolies Monopoly higher price for a good lower output Loss of potentially beneficial transactions will lead to inefficiency in the market Otherwise known as a dead weight loss Marginal revenue will decrease as a firm sells more units Why do we have monopolies o Barriers of entry typically expensive industries o Natural monopoly high levels of fixed cost encourage companies to merge in order to lower the average cost of production Price Discrimination The practice of charging buyers different prices for the same goods Allow sellers to increase profits o 3 criteria Must have some degree of market control Must be able to prevent the good from being resold Must be able to divide its customers based on their willingness to pay o Can be perfect or imperfect Perfect Each buyer spends exactly how much he or she is willing to pay Imperfect Firm separates customers into different groups based on their willingness to pay according to characteristics flexibility or quantity purchased Can improve society s wellbeing by increasing total quantity of output sold which increases surplus and decreases deadweight loss Monopolistic Competition A Market structure made up of many firms that can easily enter exit the market Each selling a differentiated product results in a slightly more inelastic demand curve allowing them to better set prices o Location advertising product features Short run can earn positive economic profit Long run profits are eliminated because more firms enter the market Can result in higher prices but gives consumers a bigger variety of choices for goods and services Tuesday April 16th Oligopoly and Game Theory Oligopoly A few large companies significant barriers to entry interconnected pricing o Each firm must take its competition s prices into consideration and as a result tend to be really similar o Collusion kind of like an economic cartel by operating together kind of like a monopoly Maximizes total combined prices which are shared However this is not an equilibrium and is very unstable o Nash Equilibrium Each firm uses its best strategy based on what it thinks the other company will do Similar to a tennis game Success relates to how each firm acts Payoff matrix Represents all possible strategies and payoffs based on how the other firm acts 1 Oligopoly companies are able to generate the highest combined revenues when they collude and split the market 2 When companies have an incentive to break the agreement they can do so but will end up making themselves worse off Must pursue a Nash equilibrium also known as a prisoner s dilemma Prisoner s dilemma o Occurs when oligopoly companies try to outsmart their competitors