Course review
Review each learning objective in this topic, then open its concept explanation or question set.
Learning objective
• Perfect competition has many firms, free entry, and homogeneous products • Monopoly has a single or dominant firm, high barriers to entry, and no close substitutes • Oligopoly has a few large firms, high barriers to entry, and interdependence • Monopolistic competition has many firms, free entry, and product differentiation
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Learning objective
• Profit maximization occurs where marginal cost equals marginal revenue • Profit equals total revenue minus total costs • Abnormal profit occurs when average revenue exceeds average cost; normal profit when they are equal; losses when average revenue is below average cost • Calculation [HL]: profit, MC, MR, AC, and AR from data
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Learning objective
• Market power is the ability of a firm to influence price • Perfectly competitive firms have no market power and are price takers • Imperfectly competitive firms have varying degrees of market power and are price makers • Diagram: perfectly competitive firm as price taker where P = D = AR = MR • Diagram: perfectly competitive firm showing abnormal profit, normal profit, and losses • Diagram: perfectly competitive market equilibrium and allocative efficiency where P = MC or MB = MC
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Learning objective
• Monopoly profit maximization can create allocative inefficiency and welfare loss • Monopoly may restrict output and raise price compared with perfect competition • Natural monopoly is a special monopoly case linked to economies of scale • Diagram: market power where AR exceeds MC • Diagram: monopolist showing abnormal profit, normal profit, and losses • Diagram: monopoly versus perfect competition with welfare loss • Diagram: natural monopoly
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Learning objective
• Oligopoly can be collusive or non-collusive • Interdependence creates risk of price war, incentive to collude, and incentive to cheat • Oligopoly may create allocative inefficiency • Firms may use price and non-price competition • Market concentration can be measured using concentration ratios • Diagram: collusive oligopoly acting as a monopoly • Diagram: simple game theory payoff matrix
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Learning objective
• Monopolistically competitive firms maximize profit in the short run and long run • Many substitutes make demand more elastic than monopoly demand • Monopolistic competition is allocatively inefficient but offers more product variety and less inefficiency than monopoly • Diagram: monopolistically competitive firm showing abnormal profit, normal profit, and losses • Diagram: monopolistic competition with more elastic demand than monopoly
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Learning objective
• Large firms may gain economies of scale, including natural monopoly efficiencies • Abnormal profit may fund research, development, and innovation • Market power risks include lower output, higher prices, and reduced consumer choice
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Learning objective
• Governments may use legislation, regulation, government ownership, and fines • Responses target abuse of significant market power
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