Microeconomics Test Review
Chapters 23-29 
Product and Factor Markets     
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Product Market Introduction

23. Pure Competition

24. Monopoly

25. Monopolistic Competition

26. Oligopoly

27. Factor market models

28. Wage Determination

Rent Interest Profits

9 Minute Micro Review Video

Pure Competition

Monopolistic Competition

Oligopoly

Monopoly

Number of companies

Infinite

Many

Few

One

Similarity of product

Identical

Different

Standardized or Differentiated

Not Applicable

Ease of new firm entry

Very Easy

Relatively Easy

Very Difficult

Not Possible

Control over price
(elasticity of demand)

None

Some

Interdependent

Substantial

Non-Price competition (Advertising)

Industrial

Substantial emphasizing product differentiation

More for Consumer than Industrial Goods

Good Will Advertising

Examples

Agriculture

Clothes

Autos and Steel

Utilities

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
                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.
   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
 

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 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 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. 

     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 differentiated.
        B. Examples include many industrial products such as steel
             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.