Econ Final Review Sheet Chapter 12 Perfect Competition Neoclassical Economics the assume away the problem MP and MC curves shows where the MP starts to fall and the MC starts to incline Perfect Competition what makes the model of the free market work does not work without this Characteristic Assumption of Perfect Competition 1 Infinite Number of Firms 2 Homogenous Product all the same product 3 Small market share No market power no influence on what goes on in the market 4 No concern with competitors marketing and production decisions 5 Perfect information everybody has access to exactly the same information 6 Free Entry and Exit anyone can enter the industry anyone can leave the industry not going to have an impact it is costless to enter the industry These firms are price takers they take the price the market gives them all the individual firms take the price the market gives them Looks like a horizontal line Perfect Competition Foundation of free market system MR MC produce more MR MC max profits MR MC produce less Total Profit Total Revenue Total Cost Price MR For perfectly competitive firms the profit maximizing rule is P MR MC On a graph maximized profit occurs where the MC crosses the P line TR area of ABCD square TC area of ECDF rectangle drawn to the ATC line TT Profit Maximizing Rule P MC Rational Firm wants to maximize profit Total Profit TR TC TR P x Q TC ATC x Q area of lower rectangle When profits are greater than zero these profits are called excessive profits economic profits abnormal profits and monopoly profits As price falls slowly get rid of economic profit When profits equal zero these profits are called Normal Profits Key Characteristics of Perfect Competition in the Long Run 1 Profits Zero Normal Profit 2 P MC Min ATC Total Cost Total Revenue Profit The shut down point for a firm is when the price falls at or below minimum average variable cost AVC In Roger and Me post just post your response no need to pos ton anyone else s post Perfect Competition These define a perfectly competitive market firm 1 Infinite number of firms 2 Homogenous Product 3 Small market share no market power 4 No concern with their competitors 5 Perfect information shared with everyone equally 6 Free entry and exit Long Run Results of P C Individual Firm Profit Max Rule P MC 1 Normal Profits 2 P MC MINatc efficient 3 S D sets price 4 Price curve and marginal revenue curve are the same curve Monopoly How to maintain a monopoly 1 Rigid Barriers to Entry access to oil to be a company a Government Franchise and Licenses b Patents and Copyrights c Ownership of an entire supply of a resource Demand curve is downward sloping MC crosses ATC at minimal price MR MC To get quantity you go where MR MC to find price you go up to the demand curve and go left to find the price Price Discrimination How are they able to charge one person one price and someone else another price ex Airline tickets 1 Have to have control over price 2 Product can t be resell able 3 Determine how willingness and ability to pay varies among different buyers Imperfect Competition When more than one seller competes with other sellers that are all producing similar products each firm has some control over their price How do they do this Through product differentiation ex Crest Colgate 1 Monopolistic Competition characteristics below when other firms enter the industry it takes away from firms that are already in the industry a Relatively large number of firms each with some market power b Products are not perfect substitutes they are differentiated c Do not consider rivals reactions when making pricing and production decisions d Relative freedom of entry and exit e No opportunity to collude in ways that reduce competition Oligopoly 1 Large of firms but a few firms dominate the market set price and control price and everyone else follows 2 Entry is difficult to impossible there s strong barriers to entry 3 products can be differentiated or they can be standardized 4 Market is highly concentrated a few firms control the market comes from number one 5 Firms are aware of and consider their rivals actions and reactions Maintaining Oligopoly 1 Barriers to entry 2 costs and technological advantage Price Rigidities sticky rigid unresponsive to changes in demand or marginal cost The Kink demand curve HerFindahl Hirschman Index H H Index Square all the market shares of firms in the industry then sum all the firms in the industry to decide if the industry is concentrated or not 0 is unlikely no concentration 10 000 100x1 2 complete concentration or a single monopoly 1 Post Merger HHI 1000 consider market to be unconcentrated unlikely to have adverse competitive impact 2 3 If Post Merger HHI 1000 18000 1000 1800 moderately concentrated if HHI changes 100 then it s not considered to have adverse competitive consequences if change in HHI is 100 then it is going to have adverse competitive consequences Industry is highly concentrated if HHI is 1800 if post merger change in HHI is 50 it s not likely to have adverse competitive consequences if post merger change in HHI 50 then it is likely to have adverse competitive consequences 3 5 10 2 1 find HHI of that 3 2 5 2 10 2 2 2 1 2 supposed companies 4 and 5 merge what s the new HHI how does this change the HHI 3 2 5 2 10 2 3 2 Questions on Perfect Competition and how to find the profit maximizing level of output find the long run how to graph it long run comparisons between all the firms monopolies perfect competition oligopoly perfect monopolistic competition Cartels become more like a monopoly by coming together and speaking with one voice has to be barriers to entry to organize a cartel The tendency is to cheat and if everyone cheats they re back to zero and wont make excessive profits Game theory A Beautiful Mind thinking several moves ahead and so is your competitor helps make strategic decisions pay off matrix Expect your opponent to make moves in your favor so you can carry out your offensive strategy Dominant Strategy strategy that is best for player no matter the other player s strategy What to deal with game theory industry leader sets the price everyone else follows them it s illegal but hard to prove Oligopolies example beer industry three breweries control 80 of the beer in the country market with hundreds or thousands of firms with the sales being dominated by the top 3 4 10 breweries Externalities External Costs uncompensated cost that an individual or firm imposes on the other