Microeconomics Test Review II: Product and Factor Markets
Economics Test Review Notes has all our free economics review notes.

I. Product Market Review    II Pure Competition    III. Monopoly    IV. Monopolistic Competition   

V. Oligopoly          VII. Factor market models      19 Minute Micro Review Video

I. Product Market Review

View Entire Introduction to Part 2

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 Possible

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


II. Pure Competition Review View Entire Chapter 23






A purely competitive market exists when the number of independently acting buyers and sellers is so large that  individual participants have no affect on market price and quantity.

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 of Competition
       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
        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.
C. 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



III. Monopoly View Entire Chapter 24

A monopoly exists when one firm has  continued control over a unique market.
A. By controlling supply and therefore price, a monopoly
     may earn high economic profit.
B. Continued existence presupposes barriers
     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 regulated.
                 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 of scale and ATC curve may be below that of PC. 
               b. Creates the necessary profit and profit potential required for investors to assume risk
                   associated with large capital
investment requirements including ever-increasing R & D. 

IV. Monopolistic Competition View Entire Chapter 24

     A. A monopolistically competitive market exists when a substantially large 
          number of firms serve a  market with relatively differentiated products.
     B. Examples are merchandising  selling  shoes, shirts, TV's, groceries, etc.
     C. Product differentiation
          1.For some it is real, important, for others it's artificial, unimportant.
             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.
     D. 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 of 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. 

V. Oligopoly View Entire Chapter 26 


    A. An oligopoly market exists when barriers to entry result in a few producers.
         1. Products may be homogeneous or differentiated.
         2. Examples include many industrial products such as steel and consumer goods like soda. 
         3. Automobile, steel, game consoles and other oligopolistic industries lost monopoly power
             because of the foreign invasion beginning in the 1970's.
             a. Eventually American companies became more competitive.
             b. The price was lower real wages for manufacturing workers.
             c.  The oligopolistic nature of the video game consol market
         4. Concentration ratios measure the amount of total output controlled by a few firms.
             a. eight-firm concentration ratio - Amosweb is Economics ..
             b. four-firm concentration ratio -Amosweb

5. Readings
             a. Six movie studios movie studios receive 90% of American film revenues.
              b. The television industry is mostly an oligopoly of five companies: Disney/ABC , CBS
              c. NBC Universal Time Warner and News Corporation See Concentration of media ownership .
              d. Four major music companies receive 80% of recording revenues.
              e. Four wireless providers control 89% of the cellular telephone market.

f. There are just six major book publishers.
              g. Healthcare insurance in the United States consists of very few insurance companies controlling
                  major market share in most states. For example, California's insured population of 20 million is
                  the most competitive in the nation and 44% of that market is dominated by two insurance 
                  companies,  Anthem and
Kaiser Permanente.
 h. Anheuser-Busch and Miller Coors control about 80% of the beer industry.   
Three well-defined pricing models exist
              1. Kinked demand  

              2. Collusive pricing
              3. Price leadership 


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

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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28) Wage Determination


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29) Rent, Interest, and Profit