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Microeconomics Test Review II: 
Product/Factor Markets Review

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 I. Introduction
to Part II
     A. Part II investigates the many individual markets that exist in a market economy
     B. Product markets and factor markets are examined.
     C. Products include consumer goods and services and industrial goods.
     D. Factors include land, labor, capital, and enterprise.
II. Product market models






II. Pure Competition chapter 23
     1. Economic analysis of pure competition
         A. Competition is efficient.
              1. Price settles where LRATC is at its lowest point
                   indicating goods are produced efficiently.
              2. P = MR = MC indicating that resources are 
                  allocated efficiently as the $'s spent by consumers
                   (P) = the $'s received by producers (MR) = the
                   $ cost of producers (MC) and  economic profit is zero.
          B. Shortcomings
              1. Spillover costs (pollution) and benefits (education) 
                  aren't properly measured resulting in goods being 
                  very and under produced.
                  a. Government intervention was needed to lower 
                      automobile pollution.
                  b. Government. props education with grants,  
                      inexpensive loan to students/colleges.
              2. Monopoly power develops to negate Adam Smith's
                  "invisible hand" of competition which
                   is required to assure that the purely competitive 
                   adjustment occurs.
              3. Eliminating economic profit makes it difficult for 
                  competitive firms to afford expensive R & D
                  and technology.
     2. Competitive supply
         a. A firm's MC curve is its short-run supply curve.
         b. Industry supply is the horizontal summation of the 
             firm's supply curves

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Model Characteristic

Pure Competition

Monopolistic Competition



Number of companies





Similarity of product



Standardized or Differentiated

Not Applicable

Ease of new firm entry

Very Easy

Relatively Easy

Very Difficult

Not Possibl

Control over price
(elasticity of demand)





Non-Price competition (Advertising)


Substantial emphasizing product differentiation

More for Consumer than Industrial Goods

Good Will Advertising




Autos and Steel


24) Monopoly






An increase in demand or decrease in cost would eliminate loss.

25 Monopolistic Competition
26) Oligopoly 
A normal-form    game Player 2 chooses left Player 2 chooses right
Player 1 chooses top 4, 3 −1, −1
Player 1 chooses bottom 0, 0 3, 4
A loss would occur if demand fell pushing MR down and to the left or cost could go up.
  IV. A monopoly exists when one firm has  continued control over a unique
        A. By controlling supply and therefore price, a monopoly may earn high
             economic profit.
        B. Continued existence presupposes barriers
which restrict market entry
             of competing firms.
        C. Barriers to entry
             1. Economies of scale require
                 a. Large initial capital investment
                 b. Large R & D expenditures
             2. Ownership of raw material, strategically located land, etc.
             3. Patents and copyrights
             4. Unfair competition
             5. Natural barriers to entry lead to natural monopolies.
                 a. Economies of scale can be so large that more than one producer
                     is illogical.
                 a. Natural monopolies reduce duplication, waste, and confusion.
                 c. Natural monopolies are often privately owned and publicly
                 d. Example: public utilities
                 e. Deregulation in the 1980's and 1990's decreased the importance of
                     natural monopolies.

D. Economic analysis of monopoly
             1. With pure competition
                 a. P = MR = MC 
                 b. Production is at the lowest point on ATC curve.
             2. With Monopoly  
                 a. P > MR = MC
                 b. Production is not at the lowest point indicated by the ATC curve.
                 c. Quantity produced is restricted.
             3. A monopoly is a price maker.
        E Are monopolies inefficient
           1. There are many inefficiencies.
               a. Lack of competition makes monopolies wasteful as there is nothing
                   to force efficiency.
               b. Advertising just to enhance barriers to entry.
               c. Litigate to protect monopoly power
               d. Active politically to protect monopoly power
           2. Large scale efficiencies
               a. Bigness creates efficiencies (economies of scale) and ATC curve
                   may be below that of  Pure Competition. 
               b. Creates the necessary profit and profit potential required for 
                   investors to assume the risk
                   associated with large capital
investment requirements including
                    ever-increasing R & D. 
V. A monopolistically competitive market exists when a substantially large
      number of firms serve a  market with relatively differentiated products.
     A. Examples are merchandising  selling  shoes, shirts, TV's,mgroceries, etc.
     B. Product differentiation
          1.Some feel it is real and important while others feel it is artificial and 
             a. Non-price competition differentiators
                 1. Product quality
                  2. Product image (Branding)
                  3. Customer service
                  4. Store environment and image
              b. Condition for sale (location)
                  1. Mail order
                  2. Home delivery using the internet
                  3. Bidding on the internet
     C. Some control over price exists and demand tends to be more elastic 
          than with monopoly or oligopoly markets.
Economic analysis of monopolistic competition
         1. P is high compared to pure competition (P> MR = MC)
         2. Quantity will be restricted causing ATC to be higher than that 
              indicated by the curve's lowest point
         3. Tends to be more competitive than monopoly and oligopoly.
         4. Some believe economic profit tends toward zero as the number
             of firms
adjust to varying profit levels.
 VI. An oligopoly market exists when barriers to entry result in a 
        few mutually dependent
companies controlling a substantial portion of a market. 
        A. Products may be homogeneous or
        B. Examples include many industrial products such as
             and large consumer durables such as appliances. 
        C. Automobile, steel,
game consoles and other oligopolistic
             industries lost monopoly power because of the foreign
             invasion beginning in the 1970's.
        D. Economic analysis of oligopoly 
              1. Restrictive oligopolies tend to be very monopolistic in 
                  nature with
                  a.  P > MR = MC
                  b.  Production is not at the lowest point indicated by the ATC curve.
                  c.  Economic profits exist and quantity is restricted.
              2. Progressive oligopolies have high economic profits in spite  
                  of price decreases brought
on by high-tech efficiencies. 


VII. Factor market models
      A. Factors (economic resources) are used to
            make goods and services sold in product
      B. Four factor markets will be examined.
           Factor                   Income Received
           1. Land                  Rent
           2. Labor                Wages
           3. Capital               Interest
           4. Enterprise           Profit
     C. Economic concerns to be evaluated when 
         analyzing factor markets include:
         1. Amount and proportion of factors hired 
         2. Amount & distribution of factor income 
         3. Economic efficiency of different model

From 27) Demand for Economic Resources 



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29) Rent, Interest, and Profit

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