Comprehensive Guide to Unit 4: Imperfect Competition

Imperfect Competition

Market structures that fall between Perfect Competition and pure Monopoly.

Market Power

The ability of a firm to control the price of its product.

Price Makers

Firms that have the ability to set prices, as opposed to price takers in perfect competition.

Oligopoly

A market structure characterized by a few large firms that dominate the market.

Monopoly

A market structure where a single firm is the sole producer of a product with no close substitutes.

Barriers to Entry

Obstacles that prevent new competitors from easily entering the market.

Economies of Scale

Cost advantages that large firms experience as they increase production.

Natural Monopoly

A type of monopoly that occurs when a single firm can supply the entire market more efficiently than multiple firms.

Allocative Inefficiency

A situation where the price charged by a monopolist is higher than the marginal cost.

Deadweight Loss (DWL)

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Marginal Revenue (MR)

The additional revenue that will be generated by increasing product sales by one unit.

Average Total Cost (ATC)

The total cost per unit of output produced.

Consumer Surplus

The difference between what consumers are willing to pay for a good or service versus what they actually pay.

Price Discrimination

The practice of selling the same product to different buyers at different prices.

First-Degree Price Discrimination

Charging each customer the maximum price they are willing to pay.

Monopolistic Competition

A market structure that combines elements of monopoly and perfect competition.

Excess Capacity

The gap between the quantity produced and the productive efficient quantity.

Game Theory

The study of how firms behave in strategic situations.

Dominant Strategy

A strategy that is best for a player regardless of what the opponent chooses.

Nash Equilibrium

A situation where no player benefits by changing their strategy while the other players keep theirs unchanged.

Collusion

Firms acting together to fix prices or output.

Cartel

A formal agreement among firms to act as a monopoly.

Short-Run Equilibrium

The state of a market in which economic profits may exist and firms can adjust production.

Long-Run Equilibrium

A situation where firms earn normal profit and all economic profits are eliminated.

Legal Barriers

Obstacles such as patents and copyrights that prevent entry into a market.

Control of Resources

Owning essential raw materials that give firms a competitive edge.

Price Control

The ability of firms in various market structures to influence or set the price of their products.

Market Structure

The characteristics and organization of a market, influencing the firms' strategies and behaviors.

Profit Maximization Rule

To maximize profit, firms produce where Marginal Revenue equals Marginal Cost.

Market Demand Curve

A graphical representation of the relationship between the price of a product and the quantity demanded by consumers.

Inelastic Demand

A situation where a price change leads to a smaller percentage change in quantity demanded.

Elastic Demand

A situation where a price change leads to a larger percentage change in quantity demanded.

Utility Regulation

Government rules that control prices in natural monopolies to ensure fair prices for consumers.

Socially Optimal Price

A price equal to marginal cost, ensuring allocative efficiency.

Fair Return Price

A price equal to average total cost, allowing the firm to break even.

Differentiated Products

Products that are similar but not identical in the eyes of consumers.

Advertising

The activity of promoting products to increase demand and shape market perceptions.

Productive Inefficiency

When firms do not produce at the minimum point of the ATC curve.

Payoff Matrix

A table showing potential outcomes for players based on their choices in strategic situations.

Cartel Instability

The tendency for firms in a cartel to cheat on agreements to gain a competitive advantage.

Mr. DARP

A mnemonic for Perfect Competition denoting that Marginal Revenue equals Demand equals Average Revenue equals Price.

Price Taker

A firm that must accept the market price because it is too small to influence that price.

Long-Run Adjustment

The process by which firms enter or exit a market until profits are normalized.

Strategic Behavior

Actions taken by firms in an oligopoly to influence the market and other firms.

Consumer Surplus Loss

The loss in consumer welfare due to monopolistic pricing above marginal cost.

Incentive to Cheat

The lure for members of a cartel to undercut prices or increase output to increase their market share.