Microeconomics Final Exam Study Guide: Market Structures, Production, and Costs

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Production Possibilities Curve: Illustrates the trade-offs between two goods, showing opportunity cost and efficiency. The curve is typically concave due to increasing opportunity costs.
Opportunity Cost: The value of the next best alternative foregone when making a decision.
Supply and Demand: Fundamental concepts describing how prices and quantities are determined in markets. The intersection of supply and demand curves determines equilibrium price and quantity.
Elasticity: Measures responsiveness of quantity demanded or supplied to changes in price, income, or other factors. Key formulas include:
- Price Elasticity of Demand:
- Income Elasticity of Demand:
Consumer Choice: Analysis of how consumers allocate their income to maximize utility, subject to budget constraints.
Short-Run and Long-Run Costs: Differentiates between costs that vary with output in the short run (some inputs fixed) and the long run (all inputs variable).

Long-Run vs. Short-Run: In the short run, at least one input is fixed; in the long run, all inputs are variable.
Law of Diminishing Returns: As more units of a variable input are added to fixed inputs, the additional output from each new unit eventually decreases.
Economies of Scale: Occur when increasing production lowers average cost. Diseconomies of scale occur when average cost rises as output increases.
Cost Structures:
- Total Cost (TC):
- Average Cost (AC):
- Marginal Cost (MC):

M arket Structure: Many buyers and sellers, homogeneous products, free entry and exit.
Profit Maximization: Firms maximize profit where (Marginal Cost equals Marginal Revenue).
Short-Run and Long-Run Equilibrium:
- Short-run: Firms may earn profits or losses.
- Long-run: Entry and exit drive economic profit to zero.
Supply Curve: In the short run, the firm's supply curve is the portion of its MC curve above AVC (Average Variable Cost).
Shutdown Rule: Firms shut down in the short run if price falls below AVC.
Efficiency: Perfect competition leads to allocative and productive efficiency.

Market Structure: Many firms, differentiated products, free entry and exit.
Short-Run and Long-Run:
- Short-run: Firms can earn profits.
- Long-run: Entry erodes profits; firms produce at excess capacity.
Product Differentiation: Firms compete on product features, branding, and quality.
Advertising: Used to differentiate products and increase demand.
Comparison with Perfect Competition and Monopoly:
- Monopolistic competition has more variety than perfect competition but less market power than monopoly.

Market Structure: Few large firms, products may be homogeneous or differentiated.
Barriers to Entry: High barriers due to economies of scale, patents, or strategic behavior.
Interdependence: Firms' decisions affect each other; strategic behavior is important.
Game Theory: Used to analyze strategic interactions.
- Nash Equilibrium: Situation where no player can benefit by changing strategy unilaterally.
- Repeated Games: Strategies may differ when interactions are repeated.
- Entry Deterrence: Incumbents may act to prevent new firms fromm entering.

Market Structure: Single seller, unique product, high barriers to entry.
Sources of Monopoly Power: Control of resources, government regulation, economies of scale.
Profit Maximization: Monopoly sets output where , but due to downward-sloping demand.
Deadweight Loss: Monopoly leads to loss of consumer and producer surplus compared to perfect competition.
Regulation: Government may regulate monopolies to reduce inefficiency (e.g., antitrust laws such as Sherman Act, Clayton Act).
Price Discrimination: Charging different prices to different consumers based on willingness to pay.

Perfect Competition: Many firms, zero long-run profit, efficient allocation.
Monopolistic Competition: Many firms, differentiated products, zero long-run profit, excess capacity.
Oligopoly: Few firms, strategic interaction, potential for collusion.
Monopoly: One firm, persistent profit, inefficiency, potential for regulation.

Market Structure	Number of Firms	Product Type	Entry Barriers	Long-Run Profit	Efficiency
Perfect Competition	Many	Homogeneous	None	Zero	High
Monopolistic Competition	Many	Differentiated	Low	Zero	Moderate
Oligopoly	Few	Homogeneous or Differentiated	High	Positive or Zero	Variable
Monopoly	One	Unique	Very High	Positive	Low

Additional info: Some details inferred from standard microeconomics curriculum to ensure completeness and clarity.