Unit 5: Market Structures and Competition
What a firm's price and profit look like at every point between a market with a thousand competitors and a market with one.
8 topics · 26 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Perfect Competition and the Price Taker
- How it worksHow does a huge number of identical sellers force every firm in a perfectly competitive market to be a price taker?
- Common mistakeWhy doesn't a perfectly competitive firm ever face a downward-sloping demand curve of its own?
- Going furtherWhat happens to a competitive firm's sales the instant it tries to charge above the market price?
Your turn1 of 2
In a wheat market, thousands of farmers sell an identical product and any one farmer is tiny compared to the whole market. Why can't a single wheat farmer charge one cent more than every other wheat farmer and still sell anything?Profit Maximization: Marginal Cost Meets Marginal Revenue
- How it worksHow does producing where marginal cost equals marginal revenue find a firm's profit-maximizing output?
- Worked exampleFind the profit-maximizing quantity for a competitive firm facing a price of 20 dollars when marginal cost is MC = 4 + 2Q.
- Common mistakeWhy isn't the profit-maximizing quantity the one where total revenue is as large as possible?
Your turn1 of 2
A competitive firm faces a price of 25 dollars. Its marginal cost is MC = 5 + 3Q. What quantity maximizes the firm's profit?Short-Run Profit and Loss for a Competitive Firm
- How it worksHow does comparing price against average total cost and average variable cost reveal a firm's short-run profit or loss?
- Worked exampleFind the short-run profit when price is 15 dollars, quantity is 200 units, and average total cost is 12 dollars per unit.
- Common mistakeWhy doesn't a firm shut down immediately the moment it starts losing money in the short run?
- Going furtherWhat happens to a firm's decision to keep operating once price falls below its average variable cost?
Your turn1 of 2
A competitive firm sells at a price of 17 dollars, produces 286 units, and has an average total cost of 14 dollars per unit. What is the firm's short-run profit?Long-Run Equilibrium and the Entry and Exit of Firms
- How it worksHow does free entry and exit push a competitive industry's long-run economic profit down to zero?
- Common mistakeWhy doesn't zero economic profit in the long run mean firms are actually losing money?
- Going furtherWhat happens to the number of firms in an industry where every existing firm is currently losing money?
Your turn1 of 2
New food trucks keep parking on a popular corner as long as the ones already there are earning more than a normal return. Why do food trucks keep showing up at a popular corner until nobody there is making outsized profit anymore?Monopoly and Barriers to Entry
- How it worksHow do patents, control of a key resource, or huge fixed costs let a monopoly stay the only seller in a market?
- Common mistakeWhy doesn't every monopoly automatically earn a large profit?
- Going furtherWhat happens to a monopoly's market power the moment its patent on a drug expires?
Your turn1 of 2
A single company owns the only water pipes running to every house in town. Why can a single water utility charge a price no small competitor could ever undercut?How a Monopoly Sets Its Price and Output
- How it worksHow does a monopoly find its profit-maximizing quantity by setting marginal revenue equal to marginal cost, then reading price off the demand curve?
- Worked exampleFind a monopoly's profit-maximizing quantity when demand is P = 100 - 2Q and marginal cost is 20 dollars.
- Common mistakeWhy isn't a monopoly free to charge literally any price it wants?
- Going furtherWhat happens to the deadweight loss from a monopoly as its demand curve becomes more elastic?
Your turn1 of 2
A monopoly faces demand P = 108 - 2Q and has a constant marginal cost of 29 dollars. What quantity maximizes the monopoly's profit?Monopolistic Competition
- How it worksHow does differentiating its product give a monopolistically competitive firm a small amount of pricing power?
- Common mistakeWhy isn't monopolistic competition the same thing as an actual monopoly?
- Going furtherWhat happens to a monopolistically competitive firm's profit once new competitors copy its product?
Your turn1 of 2
Why do a dozen coffee shops on the same street each charge a slightly different price for what looks like the same drink?Oligopoly and Strategic Interdependence
- How it worksHow does having only a few large firms make an oligopoly's pricing depend on guessing what rivals will do next?
- Common mistakeWhy doesn't every oligopoly end up secretly colluding to fix prices?
- Ties togetherHow does an oligopoly with only a few large firms sit on the competitive spectrum between perfect competition and a monopoly?
Your turn1 of 2
Why does one airline's decision to cut ticket prices instantly become every rival airline's problem?