Econ 2106 Exam 3 Cheat Sheet

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Chapter 14
1. 4 main types of market structure based on number of firms in the industry and product differentiation: perfect competition, monopoly, oligopoly, and monopolistic competition. 2. A monopolist is a producer who is the sole supplier of a good without close substitutes. An industry controlled by a monopolist is a monopoly. 3. The key difference between a monopoly and a perfectly competitive industry is that an individual, perfectly competitive firm faces a horizontal demand curve but a monopolist faces a downward-sloping demand curve. This gives the monopolist market power, the ability to raise the market price by reducing output compared to perfectly competitive industry. 4. To persist, a monopoly must be protected by a barrier to entry. This can take the form of control of nature resources or inputs, economies of scale that give rise to natural monopoly, technological advantage, or government rules that prevent entry by other firms. 5. The marginal revenue of a monopolist is composed of a quantity effect (the price received from the additional unit) and a price effect (the reduction in the price at which all units are sold). Because of the price effect, a monopolist’s marginal revenue is always less than the market price, and the marginal revenue curve lies below the demand curve. 6. At the monopolist’s profit-maximizing quantity of output, marginal cost equals the market price. So in comparison to perfectly competitive industries, monopolist produce less, charge higher prices, and earn higher profits in both the short run and the long run. 7. A monopoly creates deadweight loss by charging a price above marginal cost: the loss in consumer surplus exceeds the monopolist’s profit. Thus monopolies are a source of market failure and should be prevented or broke un, except in the case of natural monopolies. 8. Natural monopolies can still cause deadweight losses. To limit these losses, governments sometimes impose public ownership and at other times...
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