1. List 5 statements that are true to market power economics.
1) Having more competitors leads to less market power
2) Market power allows you to pursue independent pricing strategies
3) Successful production differentiation gives you more market power
4) Imperfect competition among buyers gives them bargaining power
5) Your best choice depends on the actions that other businesses make (interdependence
principle)
2. Why is it true that lobbyists for the producers in a market influence governmental regulations
that often make it more difficult for new producers to enter the market?
● Lobbyists do not want other producers to enter the market, as it will dilute their
dominance in the market.
● It is especially true that they want to protect profits and competitive advantages through
raising rivals costs
3. Define perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect: A market structure marked by many sellers of an identical product, and long run
economic profits are driven to zero due to free entry and exit in the industry (REMMEBER UNIT
9)
Monopolistic competition: A market structure marked by many sellers of a slightly
differentiated product, and long run economic profits are driven to zero due to FREE ENTRY
and exit in the industry
(*similar to the long run effect of perfect competition, but the difference is that in monopolistic
competition, the market structure expresses products that are differentiated rather than the
same)
Oligopoly: A market structure marked by a few interdependent sellers of products that are
close substitutes, and long run economic profits are possible but NOT guaranteed.
Monopoly: A market structure marked by a single seller of a product that does not have any
close substitutes, barriers to entry are high, and long run economic profits are possible but not
guaranteed
Profits in the long run that are zero: Perfect + monopolistic (free entry)
Profits in the long run that are possible but not always guaranteed: oligopoly and monopoly
(competition/ dominance/ etc)
4. List an example of markets with perfect competition, monopolistic competition, oligopoly, and
monopoly.
Perfect competition: Agricultural products, oil markets, stock markets, etc. (ex: market for high
quality russet potatoes)
Monopolistic: (ex: retail clothing, jeans market, etc.)
Oligopoly: (ex: cell phone market or phone companies, automobile industry)
, Monopoly: (ex: YKK which makes nearly all zippers, intercity passage rail services, locally
regulated sewage disposal)
5. When, if ever, would a monopoly in a particular industry be preferred to competition within
that industry?
When it would be less costly for one firm rather than many firms to provide a good, as in a
natural monopoly
Ex: A local utility company
6. Describe the output effect and the discount or price effect and what exactly causes this in a
monopoly.
The market effect happens when a monopoly is trying to decide whether or not they should sell
more (thus, more OUTPUT or a higher QUANTITY)
Output effect:
The output effect reflects the fact that there is less output produced in monopolies than there
could be.
Monopolies produce less quantity than would occur during perfect competition.
A monopolist maximizes profit where marginal revenue equals marginal cost (MR=MC), but
since the monopolist faces a downward-sloping demand curve, MR is BELOW the price. This
means they produce LESS than the competitive quantity (where price= MC).
Discount or Price Effect:
This eventually leads to higher prices (in paper, place where MR=MC, or A, to B, where quantity
is the same but the price is driven to the maximum point intersecting the demand curve or MB
curve)
The restricted output allows the monopolist to charge prices ABOVE marginal cost, extracting
consumer surplus (at the MB or Demand curve) and converting it to producer surplus (monopoly
profits).
Deadweight loss:
The reduction in output creates inefficiency, there are consumers willing to pay more than the
marginal cost of production who don’t get the product, and producers who could profitably serve
them at competitive prices. This lost surplus is the DWL to society.
Why this happens:
A competitive firm can sell all it wants at the market price, so producing one more unit adds that
full price to revenue. But a monopolist must LOWER prices on allll units to sell more, so the
marginal revenue from an additional unit is the price minus the revenue lost from cutting prices
on previous units. This makes the monopolist more cautious about expanding output.
1) Having more competitors leads to less market power
2) Market power allows you to pursue independent pricing strategies
3) Successful production differentiation gives you more market power
4) Imperfect competition among buyers gives them bargaining power
5) Your best choice depends on the actions that other businesses make (interdependence
principle)
2. Why is it true that lobbyists for the producers in a market influence governmental regulations
that often make it more difficult for new producers to enter the market?
● Lobbyists do not want other producers to enter the market, as it will dilute their
dominance in the market.
● It is especially true that they want to protect profits and competitive advantages through
raising rivals costs
3. Define perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect: A market structure marked by many sellers of an identical product, and long run
economic profits are driven to zero due to free entry and exit in the industry (REMMEBER UNIT
9)
Monopolistic competition: A market structure marked by many sellers of a slightly
differentiated product, and long run economic profits are driven to zero due to FREE ENTRY
and exit in the industry
(*similar to the long run effect of perfect competition, but the difference is that in monopolistic
competition, the market structure expresses products that are differentiated rather than the
same)
Oligopoly: A market structure marked by a few interdependent sellers of products that are
close substitutes, and long run economic profits are possible but NOT guaranteed.
Monopoly: A market structure marked by a single seller of a product that does not have any
close substitutes, barriers to entry are high, and long run economic profits are possible but not
guaranteed
Profits in the long run that are zero: Perfect + monopolistic (free entry)
Profits in the long run that are possible but not always guaranteed: oligopoly and monopoly
(competition/ dominance/ etc)
4. List an example of markets with perfect competition, monopolistic competition, oligopoly, and
monopoly.
Perfect competition: Agricultural products, oil markets, stock markets, etc. (ex: market for high
quality russet potatoes)
Monopolistic: (ex: retail clothing, jeans market, etc.)
Oligopoly: (ex: cell phone market or phone companies, automobile industry)
, Monopoly: (ex: YKK which makes nearly all zippers, intercity passage rail services, locally
regulated sewage disposal)
5. When, if ever, would a monopoly in a particular industry be preferred to competition within
that industry?
When it would be less costly for one firm rather than many firms to provide a good, as in a
natural monopoly
Ex: A local utility company
6. Describe the output effect and the discount or price effect and what exactly causes this in a
monopoly.
The market effect happens when a monopoly is trying to decide whether or not they should sell
more (thus, more OUTPUT or a higher QUANTITY)
Output effect:
The output effect reflects the fact that there is less output produced in monopolies than there
could be.
Monopolies produce less quantity than would occur during perfect competition.
A monopolist maximizes profit where marginal revenue equals marginal cost (MR=MC), but
since the monopolist faces a downward-sloping demand curve, MR is BELOW the price. This
means they produce LESS than the competitive quantity (where price= MC).
Discount or Price Effect:
This eventually leads to higher prices (in paper, place where MR=MC, or A, to B, where quantity
is the same but the price is driven to the maximum point intersecting the demand curve or MB
curve)
The restricted output allows the monopolist to charge prices ABOVE marginal cost, extracting
consumer surplus (at the MB or Demand curve) and converting it to producer surplus (monopoly
profits).
Deadweight loss:
The reduction in output creates inefficiency, there are consumers willing to pay more than the
marginal cost of production who don’t get the product, and producers who could profitably serve
them at competitive prices. This lost surplus is the DWL to society.
Why this happens:
A competitive firm can sell all it wants at the market price, so producing one more unit adds that
full price to revenue. But a monopolist must LOWER prices on allll units to sell more, so the
marginal revenue from an additional unit is the price minus the revenue lost from cutting prices
on previous units. This makes the monopolist more cautious about expanding output.
