Summary Final Microeconomics

Unit 4.1: Imperfect Competition

There are 4 types of market structures: Perfect Competition, Monopolistic
Competition, Monopoly and Oligopoly

Imperfectly Competitive Market: It is a competitive market situation where there are

many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the
perfect competitive market scenario.
1. Monopoly: It is a market structure that consists of only one seller or producer. A
monopoly limits available substitutes for its product and creates barriers for
competitors to enter the marketplace.
2. Oligopoly: A market structure in which a few firms dominate and behave
independently. Entry of new firms is often quite difficult, and usually because of
the size of existing firms.
3. Monopolistic Competition: A relatively competitive market structure in which
many firms compete, each having a limited ability to set prices and earn
economics profits because of product differentiation.

Characteristics of Monopoly:

1. One firm selling a unique product

2. The demand curve is down sloping, with MR < D
3. High barriers to entry
4. Firm is a “price maker”
5. Economic profits in the long run
6. Not allocatively efficient (P > MC)
7. Productively efficient (P > minimum ATC)

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 Difference between Monopoly and Monopolistic Competition
A monopoly is the type of imperfect competition where a seller or producer
captures the majority of the market share due to the lack of substitutes or
competitors.
A monopolistic competition is a type of imperfect competition where many
sellers try to capture the market share by differentiating their products.

The differences between Perfectly Competitive and Imperfectly Competitive

Markets
1. Imperfectly competitive firms have a degree of power to change the price.
2. The presence of barriers entry.
3. An imperfectly competitive firm must lower its price to increase sales, while a
perfectly competitive firm can increase sales by increasing output at the current
price

Unit 4.2: Monopoly

Geographic Monopoly: It is when one company has exclusive rights to operate within a
certain geographic area.
Government Monopoly: It is a form of monopoly by which a government grants
exclusive privilege to a private individual or firm to be the sole provider of a good or
service.
Technological Monopoly: A monopoly that occurs when a single firm controls
manufacturing methods necessary to produce a certain product or has exclusive rights
over the technology used to manufacture it. Examples: Microsoft and Apple
Natural Monopoly: A type of monopoly in an industry or sector with high barriers to
entry and start-up costs that prevent any rivals from competing. Examples: railroads,
electrical power, water and utilities and telecom.
 Natural monopolies arise from economies of scale, where one firm can produce
at lower costs.
 High barriers to entry

What are the three main consequences of a lack of competition in a monopoly

market?
1. Reduced Innovation
2. Potential for Price Manipulation
3. Limited Consumer Choices

Copyright: It is a type of intellectual property that protects original works of authorship

as soon as an author fixes the work in a tangible form of expression.
 It gives an author or artist the monopoly over their intellectual property for
at least their lifetime.

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A monopoly is no productively efficient, because it does not produce at the lowest
average total cost.
A monopoly is not allocatively efficient because the monopoly price is greater than the
marginal cost of production.

Because the monopolist is the only firm in

its particular market it faces the entire
down sloping market demand curve
where it only produces in the elastic upper
half region of the demand curve to
maximize profit.

4.3: Price Discrimination

Price Discrimination: It is the ability of some monopolists to charge consumers different
prices for the same good or service.
 Example: A theater may divide moviegoers into seniors, adults, and children,
each paying a different price when seeing the same movie. This discrimination is
the most common.
The conditions that must be true for price discrimination to occur:
1. PRICE TAKERS.
2. The firm must be able to PREVENT customers from reselling the firm’s
products or services to other consumers.
3. The difference in Price is NOT based on differences in cost of production.

Perfect Price Discrimination: Charging each customer the highest price that the
customer is willing and able to pay.
 Example: Consumers buying airline tickets several months in advance typically
pay less than consumers purchasing at the last minute
 With perfect price discrimination, a monopolist produces the quantity where price
equals marginal cost (just as a competitive market would) but extracts all
economic surplus associated with its product and eliminates all deadweight loss.
 Engaging in Perfect Price Discrimination creates more profit opportunity

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4.4: Monopolistic Competition
Monopolistic Competition: It is a market structure that has similarities with both
perfect competition and monopoly. In addition, it has its own unique features.
 Example: Fast-food industry. Burger King and McDonald's

Characteristics of Monopolistic Competition:

1. The presence of many companies.
2. Each company produces similar but differentiated products.
3. Companies are not price takers.
4. Free entry and exit in the industry.
5. Companies compete based on product quality, price, and how the product is
marketed.
6. Monopolistic Competition has aspects of both monopoly and perfect competition
7. A key feature of monopolistically competitive firms is product differentiation
8. A key weakness of monopolistically competitive firms is excess capacity

In what ways Monopolistic Competition In what ways Monopolistic Competition

similar to Perfect Competition? similar to Monopoly?
There are many firms competing against Monopolistically competitive firms have
each other. For example, there are the ability to set a price for their
hundreds, if not thousands of firms in the product, though they have a narrower
fast food industry. range of prices they can choose, so
changing prices affects quantity sold
proportionally more than for a monopolist.
The barriers to entry are very low, so its They face downward-sloping demand
relatively easy for new firms to enter curve for their product because of their
into monopolistically-competitive pricing power, but the demand curve is
markets. flatter than a monopolists’.
In the short run, it is possible to earn Because they face downward-sloping
economic profit, but in the long run, demand curve, the marginal revenue is
economic profits attract competition and less than demand.
disappear.

Excess capacity (or unutilized capacity):Occurs when a firm operates or is producing

output at less than the optimum level. In other words producing at a level below its
minimum efficient scale
It can happen when there is a market recession or increased competition.

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As a result, it results in unused production capacity, which leads to higher costs and
reduced profitability for the firm.

 The graph shows that eventually, as new firms

enter and compete, demand for the existing
firm’s product decreases until a long-run
equilibrium is reached in which no firms earn
economic profit.

4.5: Oligopoly and Game Theory

Game Theory: Oligopoly can be modeled using a tool from game theory called a
payoff matrix. It is the study of strategic decision-making. Games in this context refers
to strategic situations in which a discrete number of players face choices that result in
quantifiable benefits to each.

Characteristics of Oligopoly:
1. Few Large Producers: Only few large producers control and dominate the
market.
2. Product may be similar or different
3. Price Makers: The large producers have enough market power to choose
their price.
4. Interdependence among Firms: Must take actions of other market players
into account
5. Barriers to Entry: It is difficult for new firms to enter into the market and
compete (Economies of Scale, Existing firms may cooperate to prevent new
firms from entering, and Huge name recognition)
6. Inflexible Pricing: Slowest to change prices; tend to act together.

Oligopolistic firms influence their profits and the profits of their rivals: If
oligopolists compete hard, they may end up acting very much like perfect
competitors, driving down costs and leading to zero profits for all.
If oligopolists collude with each other, they may effectively act like a monopoly and
succeed in pushing up prices and earning consistently high levels of profit.

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How Oligopolist seek Profit? What are the strategies to do so?

Unit 5: Factor Markets

5.1 & 5.2: Introduction to factor markets and change in factor demand
and factor supply
Factor Market: Are the markets for the factors of production (Land, Labor, Capital and
Entrepreneurship)
Markets happen whenever consumers and producers meet to exchange goods, services, or
in this case, factors of production.
Marginal Revenue: The additional revenue that comes from selling an additional unit of
output (∆TR/∆Q)
Marginal Product: The additional output generated by employing additional input
(Labor or machine) (∆Q/∆L).
Marginal Factor or (Resource) Cost (MFC/MRC): The additional cost paid by the
firm when it hires an additional worker or other resource.
Marginal Revenue Product (MRP): Is the change in the total revenue generated when
∆ 𝑇𝑅
one addition input is employed
∆𝐿
NOTE: It decreases as additional workers are hired due to the principle of
diminishing marginal returns.

Derived Demand: Refers to the fact that the demand for goods and services in the
product markets creates demand for the factors of production to produce these goods and
services.
Factors that affect Derived Demand:

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 1. Labor
2. Processed materials
3. Raw material
4. Price
5. Price of related goods
6. Substitutes
7. Consumer and producer surplus
8. Consumer preferences
9. Economic cycle

Marginal Physical Product: The additional output produced by one more unit of a
variable input.

Monopoly impact factor markets: Monopolies can distort factor markets, leading to
unequal distribution of resources and potentially exploiting factors of production.

Unit 5.3 Profit-Maximizing behavior in perfectly competitive factor

markets & 5.4 Monopsonist markets
Only way that firms try to make as much profit as possible they can reach this goal is by
decreasing their costs without decreasing their outputs.
 This means that they need to find the right mix of labors (workers) and capital
(machines) to achieve productive efficiency (Lowest ATC).

The rule that can combine labors and capital is

(the least cost combination):
Marginal product of labor/price of labor =
Marginal product of capital/Price of capital

1. If MPL/PL > MPC/PC, the firm should

employ more labor and use less capital
to minimize its ATC.
2. If MPL/PL < MPC/Pc, the firm should employ less labor and employ more capital to
minimize its ATC.

Monopsony: Occurs when there is only one consumer/buyer in the market, or where a
single buyer dominates the market.

How might government interventions, such as anti-monopoly regulations, impact a

monopsonist labor market?
1. Regulations may aim to promote fair wages and working conditions.
2. Anti-monopoly policies may encourage competition among employers.
3. Government intervention can mitigate exploitation in monopsony markets.

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 Unit 6: Market Failure and the Role of the Government

Unit 6.1: Socially efficient and inefficient market outcomes

Social Efficiency is when resources are allocated efficiently MB=MC.
When all the benefits and costs are internalized: MSB=MSC
MSB: Marginal Social Benefit
MSC: Marginal Social Cost
Means that the optimal level of output is achieved where the cost to society derives
from its consumption.
 Any more output would result in the cost exceeding the benefit.
Any less output would result in a potential welfare gain for society.

Market Equilibrium Quantity MB=MC . They are socially optimal

The Causes of Market Failure:

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 P* represents the socially optimal
price
Q* represent the socially optimal
quantity

Socially efficiency maximizes

economics welfare as seen in the
figure. The sum of producer and
consumer surplus equals total
economic surplus

Deadweight Loss: Loss of consumer and producer surplus because they are producing at
non-efficient quantity.
Causes of Deadweight Loss:
1. Taxes and trade barriers
2. Price flooring/Price Ceilings
3. Imperfect competition
4. Asymmetric Information
5. Public Goods

Unit 6.2: Externalities

Externality: External Cost or Benefit is placed on members of society who did not
participate in the market transaction. In other words, unintended side effects of the
production and consumption of good or a service.
 Example: Pollution caused by commuting to work
Private Goods: Are those whose ownership is restricted to the group or individual
that purchased the good for their own consumption.

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  Example: We encounter private goods every day. Examples include a dinner at a
restaurant, a grocery shopping, airplane rides, and cellphones.
Public Goods: A good or service that is provided by the government. Goods tend to
work best as public goods if they are non-rival and non-excludable. Public goods are
financed by tax revenue.
 Example: Law enforcement and public parks

Sometimes a good or service creates a benefit for some that are neither the producer nor
the consumer of the good or service.
 When this happens, economists call it a positive externality.

Example on Positive Externality

Example on Negative Externality

In case of a positive externality, what should the government do?

The government can provide a per-unit subsidy to either the producer or the
consumer in order to achieve the socially optimal quantity of output.
In case of a negative externality, what should the government do?
The government can assess a per-unit tax on producers in order to bring about the
socially optimal price and quantity.

Market Failure exists because producers are only taking into account their private
actions, where MPB = MPC

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When this situation does happen, government intervention is needed to produce at
socially optimal amount
MSB = MSC
Government intervention is NOT needed to produce at the socially optimal amount
if:
1. Well-defined property rights
2. Low/zero transactions costs

Unit 6.3 Public and Private goods

Non-excludable goods and excludable goods are opposites.
Non-excludable goods are public goods that cannot exclude a certain individual or
group of individuals from using them. For this reason, it is nearly impossible to restrict
access to the consumption of non-excludable goods.
 A public road is an example of a non-excludable good.
You cannot legally enjoy a Nike Air Jordan shoe without first buying it, and it's easy for
Nike to prevent you from wearing Air Jordans unless you pay for it. Thus, shoes are an
excludable good.
 Excludable goods are private goods, while non-excludable goods are public
goods.

Goods are either classified as rival or non-rival.

A rival good is something that can only be possessed or consumed by a single user.
A good that can be consumed or possessed by multiple users, on the other hand, is
said to be a non-rival good.
The internet and radio stations are examples of goods that are nonrival.

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 Characteristics of Private
and Public Goods

The Free-Rider Problem:

A free rider is someone who wants others to pay for a public good but plans to use the
good themselves; if many people act as free riders, the public good may never be
provided.
Markets often have a difficult time producing public goods because free riders attempt
to use the public good without paying for it.
One common example is when people do not pay for a public good or service, such as
public transportation, but still use it. This can lead to a decline in the quality of the
service and make it difficult for the provider to sustain the service.

Pure Public Goods: Are 100% non-excludable & 100% non-rivalrous

Club Goods: The government chooses to provide them.
Common Resources: It is any scarce resource, such as water or pasture, that provides
users with tangible benefits but which nobody in particular owns or has exclusive claim
to.
Private individuals OVERCONSUME these resources, creating the “Tragedy of the
commons”

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Examples on Private and Pure Public Goods

Unit 6.4: The Effects of the Government Intervention in Different

Market Structures
Imperfectly Competitive Markets such as Monopolistic Competition, Oligopoly, and
Monopoly are examples of market failures.
They do not provide the socially optimal price and quantity of a good or a service.

Government Intervention
a regulatory action carried out by any government that directly impacts a market
economy to change the free market equilibrium.
 It is necessary because of the market inefficiencies and failures. For example:
taxes, Subsidies, Price Floor, Price Ceiling, Antitrust policies and regulations
Per-unit tax & Lump Sum Tax
A lump sum tax is a total fixed cost a therefore will not impact the production
decisions of a firm. On the other hand, a per unit tax is like a variable cost, and variable
costs impact MC which impacts the output decisions of a firm.
Per-unit subsidy & Lump Sum Subsidy
Lump sum subsidies are subsidies of a fixed amount to producers. Lump sum subsidies
decrease the fixed costs for a firm and will shift the average total cost curve (ATC)
downward.
 Per unit Subsidy an amount of money that the government pays to either
producers or consumers for each unit of goods that is bought and sold
Non-price Regulations
Governments rules to ensure competition, environmental protection or health and safety
such as Emission standards,
pollution clean-up, licensing requirements, consumer protection.
Anti- Trust Policies
A special category of strategies exists to promote competition and prevent monopoly
pricing such as price controls and subsidies

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Note: The Government will set the price equal the marginal cost and provide a lump
sum subsidy to offset the firm’s losses in order to produce the allocative efficient
Quantity

Unit 6.5: Income Inequality

Income Inequality: It refers to how unevenly income is distributed throughout a
population. Income inequality is often accompanied by wealth inequality, which is the
uneven distribution of wealth.
Lorenz Curve: It is a graph of income inequality that shows the percentage of a
country’s income earned by a percentage of country’s households

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 Gini Coefficient
The Gini coefficient measures the extent to
which the distribution of income within a country
deviates from a perfectly equal distribution.
A coefficient of 0 expresses perfect equality
where everyone has the same income, while a
coefficient of 1 expresses full inequality where only
one person has all the income
Gini Coefficient = A/(A+B)

1. A Gini Coefficient of 0 means Perfect

Income Equality. Every Household earns an equal
amount, and the society’s Lorenz Curve is the line
equality. Area A equals Zero.
2. A Gini Coefficient of 1 means Perfect
Income Inequality

The Sources of Income Inequality:

Tax Progressivity

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Principle of Taxation

The ability to pay principle of taxation says that taxes should be collected from those with
enough income to pay the tax.
The benefit principle of taxation says that those who benefit from a public good or service
should pay the tax for the good and service.
 For example, taxes on gasoline that go to pay for road constructions, maintenance, and
improvement are based om the benefit principle

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