Summary of Different Market Structures

Monopolistic
Perfectly Competitive Monopoly Oligopoly
Competition
No. of Firms many one few many
Profit Maximization
P=MC=MR P>MC=MR P>MC=MR P>MC=MR
Condition
Entry/Exit Easy/Free with Barrier Limited Easy/Free
No, with product
Identical Goods? Yes No close substitutes Yes
differentiation
Earn Economic Profits in the
Yes Yes Yes Yes
SR?
Earn Economic Profits in the
No Yes Yes No
LR?
Produce at the Efficient
Scale (minimum of ATC) in Yes No No No
the LR?
Yes (if without
Efficient Outcome? No No No
externalities)
No (if without
Deadweight Loss? Yes Yes Yes
externalities)

CHAPTER 13 COSTS OF PRODUCTION

 Marginal product - increase in output due to an additional unit of input.

 Diminishing marginal product - marginal product of input declines as quantity of input increases.
 Various Measures of Cost:
Total Cost = Total Variable Cost + Total Fixed Cost.
Average Total Cost = Average Variable Cost + Average Fixed Cost.
Marginal Cost = (change in total cost)/(change in output).
 Relationship between Marginal Cost and Average Total Cost.
 Efficient Scale - output that minimizes average total cost.
 Economies and Diseconomies of Scale:
As output increases… Due to…
Economies of Scale LR ATC declines specialization
Diseconomies of Scale LR ATC rises coordination problems
Constant Returns to Scale LR ATC does not vary

CHAPTER 14 PERFECT COMPETITION

 Perfectly competitive market: each firm is a price-taker and faces a horizontal demand curve.
P = AR = MR.
 In the short-run: (1) firm supply curve is MC above AVC, (2) shut-down if P<AVC.
 In the long-run: (1) firm supply curve is MC above ATC, (2) exit if P<ATC, (3) enter if P>ATC.
 Market short-run supply curve is upward sloping; Market long-run supply curve is a horizontal, but
can be upward sloping.
 In the short-run, no. of firms is fixed. In the long-run, firms enter or exit the market until profit is
driven to zero.
CHAPTER 15 MONOPOLY

 Monopolist is a price-maker and faces a downward-sloping demand curve.  P > MR.

 When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q).
 The output effect—more output is sold, so Q is higher.
 The price effect—price falls, so P is lower.
 Natural monopoly - arises when a single firm can supply a good or service to an entire market at a
smaller cost than more firms could; occurs when there are economies of scale or when ATC falls as
the firm's scale becomes larger
 Monopolist always produces at the elastic portion of the demand curve.
 A deadweight loss in a monopoly stems from the fact that monopolies produce less than the socially
efficient level of output.
 Policies towards Monopolies: Regulation (set monopolist's price = MC); Antitrust Laws; Public
Ownership; Do nothing
 Price discrimination – practice of selling the same good at different prices to different customers;
occurs when the firm has market power; can increase monopoly profits & decrease deadweight loss.

CHAPTER 16 OLIGOPOLY

 Faces a downward-sloping demand curve  P > MR

 Typical firm has some market power, but not as great as that described by monopoly
 Key feature of oligopoly: tension between cooperation and self-interest
 Group of oligopolists is better off cooperating and acting like a monopolist, producing a small
quantity of output and charging a price above marginal cost.
 BUT, because the oligopolist cares about his own profit, there is an incentive to act on his own,
which limits the ability of the group to act as a monopoly.
 Collusion - an agreement among firms in a market about quantities to produce or prices to charge
 Cartel - a group of firms acting in unison
 GAME THEORY is the theory of strategic decision making.
 Nash equilibrium - economic actors choose their best strategy given all available strategies of other
players.
 Dominant strategy - best strategy for a player regardless of the strategies pursued by other players.
 The prisoners’ dilemma always has a dominant strategy—Never Cooperate.
 Cooperative outcome leads to low production, high prices, and monopoly profits, BUT self-interest
makes it difficult for the oligopoly to maintain this outcome. (Cooperation is sometimes possible in
long, repeated games and if there are large penalties for cheaters).

CHAPTER 17 MONOPOLISTIC COMPETITION

 Faces a downward-sloping demand because its product is different from those offered by other
firms P > MR.
 In the short-run, (1) if P > ATC, the firm is earning a profit; (2) if P < ATC, the firm is earning a
loss; and (3) if P = ATC, the firm is earning zero economic profit
 In the long-run, (1) if P > ATC, new firms enter; (2) if P < ATC, firms exit
 The process of exit and entry continues until the firms in the market are earning zero economic profit
(where P=ATC)
 Monopolistic competition have excess capacity  quantity of output produced by the firm is smaller
than the quantity that minimizes ATC (efficient scale)
 Externalities of entry: product-variety (positive externality) and
business-stealing (negative externality).
 Advertising is heavily used to differentiate a firm’s good from others. Firms that advertise have
stronger incentive to maintain high quality.