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1. Large number of firms 2. Easy entry and exit 3. Standardized Product (identical) 4. Price Takers

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Characteristics of Pure Competition

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It occurs in Pure Competition. Firms do not have control over product price because it cannot change market price; it can only adjust.

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What does Price Taker mean? In what market Structure does this happen and why?

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A horizontal line, perfectly elastic to individual firms.

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What does the Demand Curve look like in Pure Competition?

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Average revenue is the price Total revenue is price x quantity sold Marginal revenue is the change in total revenue you get from adding one more unit which is also price.

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What is average, total and marginal revenue in Pure Competition?

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1. The total revenue- total cost approach 2. The marginal revenue= marginal costs approach

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What are the two ways to max. profits in the short run?

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No, you should not produce because the loss you are going to make will be bigger than your fixed cost. Shutdown here --> you would not produce.

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Should you produce when price is lower than AVC, why or why not?

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It doesn't matter because the loss would be the same... there is a loss though.

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Should you produce when P=AVC?

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In pure competition or any competition its when the ATC curve meets MR line/price in pure competition (pg. 174)

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When does a firm break even?

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When its above AVC the MC line is the same as the supply line because its the quantity demanded at certain price points ... only the up sloping portion is the supply line.

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In pure competition the MC line can function as...?

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when price exceeds ATC

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When will production have economic profit?

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Profits lead to entry of new firms When new firms enter supply increases Therefore, prices decrease --> so profits decrease The Profits decrease to zero in the long run. (economic profits)

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In the long run for pure competition what happens:

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when price = the ATC and MC (you break even where P=ATC)

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Long run equilibrium in pure competition is...?

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is achieved in purely productive market. its when goods are produced in the least costly way. you are doing that you can with your resources.

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Productive Efficiency

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Happens when P=MC. From a societal point of view deals with if you are giving the right amount of money into a certain thing.

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Allocative Efficiency

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relationship between resource inputs and product outputs in the short run

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The Law of Diminishing marginal returns describes the:

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If MC is declining, ATC must be declining

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The relationship between MC and the ATC curve is such that:

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no

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Does total fixed cost change when output levels change

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Single Seller No close Substitutes Price Maker (because price directly corresponds to the quantity they provide) Blocked Entry Non-price competition

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Characteristics of a pure monopoly:

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Is a really big factor in pure monopoly but it happens everywhere. Its declining average total cost with added firm scale and this can be away that blocks entry of new firms because they wouldn't be able to start small.

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Economies of scale

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it is downward sloping. price determines quantity demanded and the monopoly controls price. only one demand curve because the firm and industry are the same.

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Pure Monopoly demand curve

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Decrease price people will buy more

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How do you increase sells

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is twice as steep as the demand line. MR is always less than price. you read price on the demand line.

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Marginal Revenue in all types of firms except Pure competition:

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MR=0... this is the peak of the total revenue curve To max profits is MR=MC

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To Max revenue firm will produce until (Revenue is not profits remember)

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no there is not because price has already been fixed.

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Is there total revenue in pure competition?

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They will produce more because max. revenue you don' t care about costs.

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A firm trying to maximize TR will produce more or less than a firm maximizing profits?

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be able to segment the market, no resale, be able to control price and to do all this you have to have some monopoly power.

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For price discrimination you have to have:

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it is charging different prices for the same product and the change in price has nothing to do with the cost it took for the product. Price discrimination has a lot to do with elasticity because it is based on the responsiveness to price

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What is price discrimination?

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If not regulated you will produce until MR=MC. (highest price) Regulated--> you produce at the break even point called fair price. produce until P=ATC or TR=TC (middle price) To produce at allocate efficiency--> is P=MC this is called the socially optimum price (lowest price) never happens because the firm would be losing money.

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Regulated Monopolies

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That there is an under allocation of resources to the certain product or service.

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What does it mean when price exceeds MC

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1. relatively large number of sellers. 2. differentiated products.- location, service,brand 3. easy entry and exit Each firm has comparatively small percentages of the total market... there has limited control over price. no collusion

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Monopolistic Competition Characteristics

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1. Four firm concentration ratio= output of 4 largest firms/ total output of the industry. 2. Herfindahl index is the sum of the squared percentage of market shares of all firms that you want to see how much power they have. (%Sn)^2

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How to measure the concentration of an industry

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gives much greater weight to larger firms. scale is from 0-10,000. the lower the number the more competitive an industry is.

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Herfindahl Index

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is highly elastic but not perfectly... so a flatter line but not horizontal.

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Monopolistic Demand

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produce until MR=MC

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To Max profits or min loss in short run for monopolistic competition

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will earn only normal profit in the long run (break even) this is because when its profitable in the short run new firms enter making it eventually you will only make normal profit.

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Long Run Monopolistic Competition

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does not obtain productive or allocative efficiency in long run equilibrium.

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How efficient is Monopolistic Competion

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product variety and differentiation.

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Benefit of Monopolistic competition

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is the closest to pure monopoly. This industry is dominated by a few large producers of a homogeneous or differentiated product. Here the larger firms have considerable control over price but they must consider the reaction of rivals. Entry barriers like economies of scale.

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Characteristics of Oligopoly

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1. Kinked Demand curve 2. Collusive Pricing 3. Price Leadership

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What are the three Oligopoly Models

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Is the belief that a firm has when it raises prices its competitors wont follow so above the average or start price it is very elastic but when you lower price all rivals will follow so under the start price point demand is less elastic (more inelastic)

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Kinked Demand

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when MC increases or Decreases quantity doesn't change price doesn't change ... nothing changes just the shift of the MC line. but profits would change...

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MC in Kinked Demand

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not producing at productive efficiency because you aren't always going to produce at the ATC therefore the dead weight loss indicates how much monopoly power you have.

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Dead Weight Loss

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productive nor allocative efficiency are likely to occur here.

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How efficient is Oligopoly

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add more firms because firms will be more responive to price because there are more substitutes.

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How can you make a monopolisticly competitive more elastic

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MC intersect the ATC curve at the min. point.

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Where do the MC and ATC curves intersect

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ATC=P and MR=MC<P

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Long run equilibrium profit maximizing for monpolistically competitive is

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when price is greater than MC

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When does underallocation happen

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is the range of consumer choice

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Excess Capacity in Monopolistic Competition

Chapter 4 Economics: Pure Competition, Pure Monopoly, Monopolistic Competition, Oligopoly – Flashcards

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