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Chapter 14

Chapter 14 to Chapter 20 (Comprehensive Notes)

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Department
Economics
Course
ECON101
Professor
All Professors
Semester
Fall

Description
Chapter  14  –  Competitive  Markets     Vocabulary     Competitive  Market:  A  market  with  many  buyers  and  sellers.  Products  are  identical,   so  each  buyer  and  seller  is  a  price  taker.     Average  Revenue:  Total  revenue  divided  by  quantity  sold.     Marginal  Revenue:  The  change  in  total  revenue  from  an  additional  unit  sold.     Sunk  Cost:  A  cost  that  has  already  been  committed  and  cannot  be  recovered.       Notes     • Competitive  market  has  many  buyers  and  sellers,  and  the  goods  offered  by   sellers  are  almost  identical.  Firms  can  also  freely  enter  or  exit  the  market  in   the  long  run.   o Any  single  buyer  and  seller  has  negligible  impact  on  the  market   equilibrium   o Each  buyer  and  seller  takes  the  given  market  price   • Total  Revenue  =  Price  x  Quantity  Sold   • Profit  Maximization:  Intersection  between  marginal  cost  and  marginal   revenue.   o If  marginal  revenue  is  greater  than  marginal  cost,  increase  output   o If  marginal  cost  is  greater  than  marginal  revenue,  decrease  output   • A  firm  should  shut  down  (short  term)  if  the  price  falls  below  average   marginal  cost.   • A  firm  should  exit  the  market  (long  term)  if  the  price  falls  below  average   total  cost.         Chapter  15  -­‐  Monopolies     Vocabulary     Monopoly:  A  firm  that  is  the  sole  seller  of  a  product  without  close  substitutes.     Natural  Monopoly:  A  monopoly  that  arises  due  to  the  fact  that  a  single  firm  can   supply  a  good  or  service  to  an  entire  market  at  a  smaller  cost  than  multiple   producers  could.     Price  Discrimination:  The  business  practice  of  selling  the  same  good  at  different   prices  to  different  customers.       Notes     • Monopoly  Resources  –key  resources  are  owned  by  a  single  firm.   o Example:  De  Beers  (South  African  diamond  company)  –  owns  80%  of   the  world’s  production  of  diamonds.   • Government-­‐created  Monopolies  –  the  government  grants  a  single  firm  the   exclusive  right  to  produce  a  good  or  service.   o Example:  Patent  and  copyright  laws   • Output  Effect  –  More  output  is  sold,  so  Q  is  higher,  which  increases  revenue.   • Price  Effect  –  The  price  falls,  so  P  is  lower,  which  decreases  revenue.   • Profit  Maximization   o The  intersection  of  marginal  cost  and  marginal  revenue  determines   quantity   o The  demand  at  this  quantity  determines  the  price.   § (Find  intersection  then  move  up  until  you  hit  demand  curve)   • Profit  =  (P  –  ATC)  x  Q   • Perfect  Price  Discrimination:  the  monopolist  knows  exactly  the  willingness  to   pay  of  each  customer  and  charges  each  customer  that  price.   o Monopolist  receives  all  surplus  (i.e.,  there  is  no  consumer  surplus)   • Imperfect  Price  Discrimination   o Second-­‐degree  –  Charging  different  prices  to  the  same  customer  for   different  units  the  customers  buy  (e.g.,  buying  in  bulk).   o Third-­‐degree  –  When  a  market  can  be  segmented  based  on  their   elasticities  of  demand.  (e.g.,  movie  ticket  price).                 Chapter  16  –  Monopolistic  Competition     Vocabulary     Oligopoly:  A  market  structure  in  which  only  a  few  sellers  offer  similar  or  identical   products.     Monopolistic  Competition:  A  market  structure  in  which  many  firms  sell  products   that  are  similar  but  not  identical.       Notes     • Imperfect  Competition   o Oligopoly  –  Market  with  few  sellers  with  similar  products.     o Monopolistic  Competition  –  Many  firms  selling  similar,  but  not   identical  products.  Each  firm  has  a  monopoly  over  the  product  it   makes,  but  many  other  firms  can  compete  for  the  same  customers.   § Many  sellers:  Many  firms  competing  for  same  customers   § Product  differentiation:  Slightly  different  products,  causing   each  firm  to  have  a  downward-­‐sloping  demand  curve  (i.e.,  not   a  price  taker  as  in  perfect  competition)   § Free  entry  and  exit:  There  are  no  restrictions  when  entering  or   exiting  the  market   • Follows  the  logic  as  a  monopolistically  competitive  firm  would  for  profit   maximization   o Chooses  the  quantity  at  which  marginal  revenue  intersects  with   marginal  cost,  then  uses  demand  curve  to  find  price  at  that  quantity.   • In  the  long-­‐run  equilibrium,  price  equals  average  total  cost.  Free  entry  and   exit  drives  economic  profit  to  zero.       • If  firms  are  making  profit,  new  firms  will  enter  causing  the  demand  curve  to   shift  left.  If  old  firms  are  experiencing  loss  and  exit  the  market,  the  demand   curve  shifts  right.  It  eventually  stabilizes  at  the  following  equilibrium.         • Firms  in  
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