PRD-3.B—b. Explain (using graphs where appropriate) equilibrium, firm decision making, consumer surplus, producer surplus,…—Topic 4.4

b. Explain (using graphs where appropriate) equilibrium, firm decision making, consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets and why prices in imperfectly competitive markets cannot be relied on to coordinate the actions of all possible market participants and can lead to inefficient outputs. c. Calculate (using data from a graph or table as appropriate) areas of consumer surplus, producer surplus, profit (loss), and deadweight loss in imperfectly competitive markets.

• In a market with monopolistic competition, firms producing differentiated products may earn positive, negative, or zero economic profit in the short run. Firms typically use advertising as a means of differentiating their product. Free entry and exit drive profits to zero in the long run. The output level, however, is smaller than the output level needed to minimize average total costs, creating excess capacity. The price is greater than marginal cost, creating allocative inefficiency.
• Enduring understanding PRD-3: Even with a common goal of profit-maximization, market structure constrains and influences prices, output, and efficiency.