AP MICROECONOMICS
REVIEW #3 (PART 2)
Rixie
April 20, 2017
MONOPOLY
Graphical Analysis; Profit-maximization; Efficiency;
Price-Discrimination; Government regulation
Monopoly– second of four market
structures
■ As much of this information is already typed out in
the Unit 3 Key Concepts Outline (PDF), most of this
section will consist of graphs/visuals.
■ Use the outline along with this PowerPoint!!!
Graph of a typical, unregulated, non-price
discriminating monopoly
• The shaded
rectangle is profit,
which is positive
because the price
is above ATC.
• The green triangle
outlines the
consumer surplus.
• The blue triangle
outlines
deadweight loss.
Graph of a non-price discriminating monopoly
Pricecompared to price-discrimination
discrimination:
1.MR increases &
becomes equal
to demand
2.The quantity
produced
increases
3.Consumer
surplus no
longer exists,
and that area
becomes part of
the profit (TR &
profit increase)
4.No DWL
Government regulation of monopolies
• Fair-return pricing:
government sets
price = ATC
• Socially-optimal
(allocatively
efficient) pricing:
government sets
price = MC
• (Both types will
increase Q and
decrease P)
MONOPOLISTIC
COMPETITION
Graphical Analysis; Profit-maximization; Efficiency
Monopolistic Competition – third of four
market structures
■ As much of this information is already typed out in
the Unit 3 Key Concepts Outline (PDF), most of this
section will consist of graphs/visuals.
■ Use the outline along with this PowerPoint!!!
Graph of a monopolistically competitive firm –
short-run profit vs. short-run loss
• The graph looks
very similar to
that of a
monopoly.
• The profit (or
loss) rectangle
is still found by
going down or
up to ATC from
the price at the
profitmaximizing
quantity
Graph of a monopolistically competitive in
long-run equilibrium
P*
Q*
• Firms in the monopolistic
competition market structure
will break even (= zero
economic profit = normal
profit) in the long-run, like
perfectly competitive firms
• Must show P = ATC by drawing
ATC tangent to the demand
curve at the price
• Unlike perfectly competitive
firms, M.C. firms are NOT
efficient
• Like monopolies, M.C. firms
have DWL (outlined in blue)
and you can also identify
consumer surplus (outlined in
green)
OLIGOPOLY
Characteristics; Payoff Matrix
How to interpret a payoff matrix
■ The value on the left in each cell is the daily payoff (profit) for PieCrust. The value on
the right in each cell is the daily payoff (profit) for LaPizza.
■ In this case, PieCrust has a dominant strategy to advertise, because regardless of
what LaPizza does, PieCrust will make more profit for itself by advertising than by not
advertising (250 > 180 & 450 > 390).
■ LaPizza has no dominant strategy, because their best strategy changes based on
what PieCrust does. If PieCrust advertises, LaPizza should not advertise, because they
will make more profit than if they do advertise (300 > 200). If PieCrust does not
advertise, LaPizza should advertise (500 > 400).
How to find the Nash equilibrium
■ If both players have access to this data, we can assume that Pie Crust
will follow their dominant strategy and advertise. LaPizza will realize
that as well, and so will choose to not advertise in order to earn more
profit (300 > 200).
■ This is the Nash equilibrium, as it can be predicted that both players
will voluntarily end up in the same cell. PieCrust will earn $450 &
LaPizza will earn $300.
How to re-draw the payoff matrix
■ The FRQ section may ask you to re-draw the payoff matrix using new information. For
instance, it may say:
– Assume the cost of advertising has increased by $20 a day. Re-draw the daily
payoff matrix to reflect this additional cost.
■ Since advertising now costs $20 more a day, the payoff (or profit) associated with
that strategy will decrease by $20, as the firms are spending more money to
advertise.
■ The strategy to “not advertise” is not affected by this. See re-drawn matrix on the next
slide.
How to re-draw the payoff matrix
Original
Payoff
Matrix:
LaPizza
New
Payoff
Matrix:
Advertise
Not Advertise
Advertise
$230, $180
$430, $300
Not Advertise
$180, $480
$390, $400
PieCrust