Microeconomics Study Guide: Market Structures and Factor Markets

Chapter 16: Monopoly

Introduction to Monopoly

A monopoly is a market structure where a single firm is the sole producer of a product with no close substitutes. Monopolies arise due to barriers that prevent entry of new firms.

• Barriers to Entry: Factors that prevent other firms from entering the market, such as control of resources, government regulation, or economies of scale.

• Legal Barriers: Patents, licenses, and other legal protections that grant exclusive rights to a firm.

Monopoly Pricing and Output

• Price Discrimination: Charging different prices to different consumers for the same good. Types include perfect (first-degree), second-degree, and third-degree price discrimination.

• Profit Maximization: A monopoly maximizes profit where marginal revenue (MR) equals marginal cost (MC).

Key Equations: $MR = MC$ Marginal Revenue: $MR = \frac{\Delta TR}{\Delta Q}$ Marginal Cost: $MC = \frac{\Delta TC}{\Delta Q}$

• Monopoly vs. Competition: Monopolies produce less and charge higher prices compared to perfectly competitive firms.

Example: A local water utility is often a monopoly due to high infrastructure costs and government regulation.

Chapter 17: Monopolistic Competition

Characteristics of Monopolistic Competition

Monopolistic competition is a market structure with many firms selling similar but differentiated products.

• Product Differentiation: Each firm offers a product that is slightly different from its competitors.

• 4-Firm Concentration Ratio: Measures the market share of the four largest firms in the industry.

• HHI (Herfindahl-Hirschman Index): A measure of market concentration calculated as the sum of the squares of the market shares of all firms in the industry.

Profit and Competition

• Short-Run Profits: Firms can earn economic profits in the short run.

• Long-Run Equilibrium: Entry of new firms erodes profits, leading to zero economic profit in the long run.

Example: The restaurant industry is an example of monopolistic competition, with many firms offering differentiated menus.

Chapter 18: Oligopoly

Oligopoly and Strategic Behavior

An oligopoly is a market structure dominated by a few large firms, which are interdependent in their decision-making.

• Natural Oligopoly: Occurs when economies of scale are so significant that only a few firms can survive.

• Monopoly Outcome: Oligopolists may collude to act like a monopoly, maximizing joint profits.

• Range of Outcomes: Outcomes can range from perfect competition to monopoly, depending on the degree of collusion.

• Cartel: A group of firms that collude to set prices and output, acting as a monopoly.

• Game Theory: The study of strategic interactions among firms.

• Nash Equilibrium: A situation where no firm can improve its outcome by changing its strategy unilaterally.

Example: OPEC is a well-known cartel in the oil industry.

Chapter 19: Markets for Factors of Production

Labor Markets and Factor Demand

The factor markets determine the demand and supply of inputs such as labor, land, and capital.

• Derived Demand: The demand for a factor of production depends on the demand for the goods and services it produces.

• Value of Marginal Product (VMP): The additional revenue generated by employing one more unit of a factor.

Key Equation: $VMP = MP \times P$ where $MP$ is marginal product and $P$ is the price of output.

• Labor Market Equilibrium: Determined by the intersection of labor demand and labor supply.

• Union Markets: Labor unions can influence wages and working conditions through collective bargaining.

Example: The demand for construction workers increases when the demand for new housing rises.

Chapter 20: Economic Inequality

Wage Differentials and Labor Supply

Wage differentials arise due to differences in skills, education, experience, and job characteristics.

• Labor Supply Curve: Shows the relationship between the wage rate and the quantity of labor supplied.

• Demand for High-Skilled vs. Low-Skilled Labor: High-skilled labor tends to earn higher wages due to greater productivity and scarcity.

• Income Maintenance Programs: Government programs designed to support individuals with low or no income, such as unemployment insurance and welfare.

Example: Engineers typically earn higher wages than retail workers due to differences in required skills and education.