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market structures and market failure

■ the four market structures: perfect competition, monopolistic competition, oligopoly, monopoly
■ be able to give examples of the types of firms that would belong to the four different market structures — examples of each were given in my video and the pdf document in Week 7 Content
■ characteristics of perfect competition — many, many, many firms or sellers, identical product produced, no barriers to entry or exit, perfect information, price-taker, horizontal demand curve for the perfectly competitive firm (P = D = MR = AR)
■ fundamental rule of profit-maximization (MR = MC)
■ short-run equilibrium for perfect competition (P = MC to maximize profit)
■ economic profit and its effect on entry and exit in markets
■ long-run equilibrium for perfect competition (P = MC and P = AC)
■ technical efficiency (P = minimum AC) and allocative efficiency (MU = MC)
■ the shut-down rule (since it applies to any of the four market structures, not just perfect competition). Be able to identify when the firm would shut-down, whether looking at numbers, or on a graph. How is the short-run shut-down rule different from the long-run shut-down rule, or are they the same?

■ characteristics of monopoly — one firm or seller, very high barriers to entry, unique product with no close substitutes, downward-sloping demand curve, price-makers meaning complete market power since the monopolist is the entire industry
■ examples of barriers to entry (patents, government licensing, predatory pricing and price discrimination, economies of scale, technical superiority, exclusive access to an important input, etc.)
■ the natural monopoly model and economies of scale
■ Why is a natural monopoly desirable from the point of view of society?
■ short-run and long-run equilibrium for the monopolist, and the profit-maximizing decisions
■ Does the monopolist earn excess economic profits in the long run? Why or why not?
■ dynamic efficiency (P > AC which implies R&D)
■ What’s the difference between 1st, 2nd, and 3rd degree price discrimination?
■ What is price discrimination?
■ costs of monopoly (DWL – a loss of both consumer and producer surplus, higher prices and less output, no technical or allocative efficiency)
■ benefits of monopoly (economies of scale, dynamic efficiency which involves earning excess economic profit in the long run which contributes to (R&D) – research & development)

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Monopolistic Competition:
■ characteristics of monopolistic competition — many firms, differentiated products, few barriers to entry and exit (i.e., easy entry and exit), downward-sloping demand curve, price-makers (and since there are many firms in this market structure, their demand curves are more elastic than in the monopoly model)
■ short-run and long-run equilibrium for the monopolistically competitive industry
■ costs of monopolistic competition: excess capacity theorem for monopolistic competition and how the excess capacity of these firms relate to the idea of “economies of scale” that doesn’t occur
■ benefits of monopolistic competition: many firms producing goods & services so there will be lots of diversity of products and services in which to choose from in the marketplace

■ characteristics of oligopoly — few firms, high concentration ratio, mutual interdependence, medium to high barriers to entry (usually in terms of cost constraints), differentiated or similar products produced, downward-sloping or kinked demand curve, market power, and usually big advertisers (think of advertisers during the Super Bowl, and that those firms are usually big businesses with few competitors)
■ concept of “mutual interdependence” in oligopoly
■ concentration ratio (i.e., CR4, CR8, etc.) and how to calculate it
■ Herfindahl-Hirschman index (HHI) – an alternative way of measuring industry concentration
■ kinked demand curve model of an oligopolist (and the elastic vs. inelastic portions of the demand curve, ending up with a “kinked” shape)
■ conclusion to the kinked demand curve is that competitors follow price decreases but not price increases, so that industry prices have a tendency to stay constant instead of fluctuating up and down
■ game theory and Nash Equilibrium (non-cooperative games with a payoff matrix, dominant strategies, optimal outcomes, etc.)
■ Who was John Nash?
■ cartels and express collusion
■ price leadership and tacit collusion

Regulation & Antitrust
■ antitrust laws (Sherman Act of 1890 & Clayton Act of 1914)
■ Sherman Act of 1890 prohibited collusion and price fixing, as well as monopolization
■ Clayton Act of 1914 prohibited actions that reduce competition in the economy such as: price discrimination, exclusive dealing, tying contract, mergers, etc.
■ know the definitions of price-fixing, monopolization, tying contracts, exclusive dealing, mergers
■ what are horizontal, vertical, and conglomerate mergers and examples of each

Market Failure
■ examples of market failure (externalities, public goods, moral hazard, tendency toward monopoly, inequality, etc.)
■ externalities, positive (spillover or external benefits) and negative (spillover or external costs)
■ market-based approach vs. a regulatory approach to negative externalities (example from the Crash Course video posted under Week 13 Content)
■ two characteristics (& examples) of public goods
■ common resources and the tragedy of the commons
■ Why does the tragedy of the commons make it complicated to solve environmental problems?
■ example of moral hazard and asymmetric information
■ income inequality, Lorenz Curve and Gini coefficient

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