Market Power eBook | SAMPLE

market power (HL Only) – Digital Resource eBook

Market power UNIT 1: Introduction to market power Foreword by Brad Cartwright ................................................................................................................1 Lesson 1: Introduction to Market Power ..................................................................................................2-7 Lesson 2: Nine Central Themes of IB Economics...................................................................................8-18

Market power UNIT 2: Introduction to rational producer behavior Lesson 1: Introduction to Costs, Revenue, and Profit Theory .............................................................19-26 Key terms and concepts: Costs, Revenue, and Profit Theory.....................................................27

Market power UNIT 3: rational producer behavior – Costs theory Lesson 1: Introduction to Costs Theory ................................................................................................28-29 key terms and concepts: Costs.....................................................................................................30 LESSON 2: The Short-Run and The Long-Run........................................................................................31-33 LESSON 3: Total Product, Marginal Product, and Average Product.....................................................34-36 LESSON 4: The Law of Diminishing Returns...........................................................................................37-39 LESSON 5: Economic Costs (Implicit and Explicit).................................................................................40-42 LESSON 6: Total Cost, Marginal Cost, and Average Cost.......................................................................43-48 LESSON 7: Short-Run Costs and Diagrams.............................................................................................49-54 LESSON 8: Long-Run Costs.....................................................................................................................55-61 Review Questions: Costs .....................................................................................................................62 IB Exam practice Questions: Costs ...............................................................................................63

Market power UNIT 4: rational producer behavior – revenue theory Lesson 1: Introduction to Revenue Theory ...........................................................................................64-65 key terms and concepts: Revenue................................................................................................66 LESSON 2: Total Revenue, Marginal Revenue, and Average Revenue..................................................67-69 LESSON 3: Revenue Curves in Perfect Competition .............................................................................70-72 LESSON 4: Revenue Curves in Monopoly, Monopolistic Competition, and Oligopoly .......................73-79 Review Questions: Revenue ................................................................................................................80 IB Exam practice Questions: Revenue ..........................................................................................81

Market power UNIT 5: rational producer behavior – Profit theory Lesson 1: Introduction to Profit Theory ................................................................................................82-83 key terms and concepts: Profit.....................................................................................................84 LESSON 2: Economic, Abnormal, Normal, and Negative Profit ..........................................................85- 87 LESSON 3: The Shut-Down Price............................................................................................................88-89 LESSON 4: The Shut-Down Price............................................................................................................90-91 LESSON 5: The Break-Even Price ...........................................................................................................92-93 LESSON 6: The Profit Maximizing Level of Output ...............................................................................94-96 LESSON 7: Showing Profit in Perfect Competition .............................................................................97-100 LESSON 8: Showing Profit in Monopoly, Monopolistic Competition, and Oligopoly .....................101-104 LESSON 9: Other Motives Besides Maximization .............................................................................105-106 Review Questions: Profit ...................................................................................................................107 IB Exam practice Questions: Profit ............................................................................................ 108

Market power UNIT 6: Market Power - Perfect competition Lesson 1: Introduction to Perfect Competition ...........................................................................................109-110 key terms and concepts: Perfect Competition ....................................................................................111 LESSON 2: The Revenue Curves in Perfect Competition ............................................................................112-115 LESSON 3: The Profit Maximizing Level of Output in Perfect Competition ...............................................116-117 LESSON 4: Abnormal Profit in Perfect Competition ....................................................................................118-120 LESSON 5: Negative Profit in Perfect Competition .....................................................................................121-123 LESSON 6: Normal Profit in Perfect Competition .......................................................................................124-126 LESSON 7: Productive Efficiency in Perfect Competition ............................................................................127-130 LESSON 8: Allocative Efficiency in Perfect Competition .............................................................................131-132 LESSON 9: The Long-Run in Perfect Competition .......................................................................................133-134 LESSON 10: Productive and Allocative Efficiency in the Long-Run .............................................................135-136 Review Questions: Perfect Competition ....................................................................................................137 IB Exam practice Questions: Perfect Competition ..............................................................................138

Market power UNIT 7: Market Power - Monopoly Lesson 1: Introduction to Monopoly ...........................................................................................................139-140 key terms and concepts: Monopoly .....................................................................................................141 LESSON 2: Sources of Monopolistic Power .................................................................................................142-143 LESSON 3: The Profit Maximizing Level of Output in Monopoly ...............................................................144-146 LESSON 4: Abnormal, Normal, and Negative Profit in Monopoly .............................................................147-151 LESSON 5: Revenue Maximization in Monopoly .........................................................................................152-154 LESSON 6: Productive and Allocative Efficiency in Monopoly ....................................................................155-157 LESSON 7: Monopoly and Perfect Competition (Comparison) ..................................................................158-161 Review Questions: Monopoly .....................................................................................................................162 IB Exam practice Questions: Monopoly ................................................................................................163

Market power UNIT 8: Market Power – Monopolistic competition Lesson 1: Introduction to Monopolistic Competition .................................................................................164-165 key terms and concepts: Monopolistic Competition ..........................................................................166 LESSON 2: Abnormal, Normal, and Negative Profit in Monopolistic Competition ....................................167-171 LESSON 3: Long-Run Equilibrium in Monopolistic Competition .................................................................172-174 LESSON 4: Productive and Allocative Efficiency in Monopolistic Competition ..........................................175-179 LESSON 5: Monopolistic Competition vs. Perfect Competition ..................................................................180-181 Review Questions: Monopolistic Competition ..........................................................................................182 IB Exam practice Questions: Monopolistic Competition .....................................................................183

Market power UNIT 9: Market Power - oligopoly Lesson 1: Introduction to Oligopoly ............................................................................................................184-185 key terms and concepts: Oligopoly .....................................................................................................186 LESSON 2: The Concentration Ratio ............................................................................................................187-189 LESSON 3: Abnormal, Normal, and Negative Profit in Oligopoly ...............................................................190-194 LESSON 4: Collusive vs. Non-Collusive Behavior .........................................................................................195-199 LESSON 5: Game Theory ..............................................................................................................................200-203 LESSON 6: Non-Price Competition in Oligopoly ..........................................................................................204-205 Review Questions: Oligopoly ......................................................................................................................206 IB Exam practice Questions: Oligopoly ................................................................................................207 SOURCES ...............................................................................................................................................................208

- Sample Lesson -

costs, revenues, and profits introduction and overview

key, core, critical concepts‌ costs and production -the short-run -the long-run -law of diminishing returns

revenues profit

costs and production • the short-run – the short-run is a time period during which at least one factor of production is fixed, such as land or capital, and cannot be changed by the firm – all production takes place in the short-run

• the long-run – the long-run is a time period in which all factors of production (inputs) can be changed – all planning takes place in the long-run source: ellie tragakes and jocelyn blink

costs and production • law of diminishing marginal returns – a law that states that as more and more units of a variable input (such as labor) are added to fixed inputs (such as land or capital), the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease

or….

– as extra units of a variable factor are added to a given quantity of a fixed factor, the output from each additional unit of the variable factor will eventually diminish source: ellie tragakes and jocelyn blink

costs and production • total product (TP) – the total quantity of output produced by a firm

• marginal product (MP) – the extra or additional output resulting from one additional unit of labor (the variable input) • this tells us how much output increases when we add one more unit of labor

• average product (AP) – the total quantity of output per unit of labor (the variable input) • this tells us how much output each unit of labor produces on average source: ellie tragakes and jocelyn blink

revenues • definition – the payments firms receive when they sell the goods or services they produce over a given period of time

• there are three fundamental revenue concepts – total revenue (TR) – marginal revenue (MR) – average revenue (AR)

source: ellie tragakes and jocelyn blink

revenues • total revenue (TR) – the total amount of money receive by firms when the sell a good or service • it is equal to the price of the good times the quantity of the good sold

• marginal revenue (MR) – the additional revenue arising from the sale of an additional unit of output

• average revenue (AR) – revenue per unit of output sold, calculated by dividing total revenue by the number of units of output produced source: ellie tragakes and jocelyn blink

profits • definition of economic profit – is a firm’s total revenue minus total economic costs • if the profit is positive, the firm is earning supernormal (abnormal) profit • if the profit is zero, the firm is earning normal profit • if the profit is negative, the firm is making a loss

source: ellie tragakes and jocelyn blink

- Sample Lesson -

profit diagrams perfect competition

all profit level questions 1.

2.

3.

4.

5.

identify market structure (“price-taker” or “price-maker”?) draw the revenue curves (D, AR, MR) draw the marginal cost curve (MC) find Q where MC = MR (profit maximizing level of output) find price

1. look at profit level in question 2. draw ATC curve

the base diagram perfect competition

source: jocelyn blink

the profit diagram perfect competition

abnormal profits

loss

“price-takers�

normal profits source: jocelyn blink

- Sample Lesson -

profit diagrams monopoly, monopolistic competition, oligopoly here we go!

all profit level questions 1.

2.

3.

4.

5.

identify market structure (“price-taker” or “price-maker”?) draw the revenue curves (D, AR, MR) draw the marginal cost curve (MC) find Q where MC = MR (profit maximizing level of output) find price

1. look at profit level in question 2. draw ATC curve

the base diagram

monopoly, monopolistic competition, oligopoly

source: jocelyn blink

the profit diagrams

monopoly, monopolistic competition, oligopoly

abnormal profits

loss

“price-makers�

normal profits source: jocelyn blink

Costs, Revenue, and Profit Fundamental Vocabulary and Concepts

Short Run Long Run Production Total Product Marginal Product Average Product The Law of Diminishing Returns Costs of Production Economic Costs Explicit Costs Implicit Costs Short Run Costs Fixed Costs Variable Costs Average Costs Average Fixed Costs Average Variable Costs Average Total Costs Marginal Cost Constant Returns to Scale Increasing Returns to Scale Short Run Average Total Cost Curve Long Run Average Total Cost Curve Economies of Scale

Specialization of Labor Diseconomies of Scale Revenue Total Revenue Marginal Revenue Average Revenue Economic Profit Normal Profit Break-Even Point Supernormal Profit Abnormal Profit Loss Profit Maximization Revenue Maximization Growth Maximization Satisficing Corporate Social Responsibility Market Structures Perfect Competition Monopoly Monopolistic Competition Oligopoly Price Discrimination

27

Oligopoly Review Questions: What you should be able to do!

Assumptions of the Model Using examples, describe the assumed characteristics of an oligopoly: the dominance of the industry by a small number of firms; the importance of interdependence; differentiated or homogeneous products; high barriers to entry.

Discuss the role of interdependence in the dilemma faced by oligopolistic firms whether to compete or to collude.

Informal/Tacit Collusion E

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Non-Collusive Oligopoly Explain that the behavior of firms in a non-collusive oligopoly is strategic in order to take account of possible actions by rivals.

Using a diagram, explain the existence of price rigidities, with reference to the kinked demand curve.

Explain why non-price competition is common in oligopolistic markets.

Describe types of non-price competition.

Explain how a concentration ratio may be used to identify an oligopoly.

Adopted from the IB Economics Subject Guide

Game Theory Explain how game theory can illustrate strategic interdependence and the options available to oligopolies.

Formal/Open Collusion E plain he erm coll sion gi e e amples and s a e ha i is s all illegal.

E plain he erm car el Explain that the primary goal of a cartel is to limit competition between member firms and to maximize joint profits as if the firms were collectively a monopoly.

Explain the incentive of cartel members to cheat.

Examine the conditions that make cartel structures difficult to maintain.

206

Oligopoly IB Exam Practice Questions

Paper 1: Essay Questions, Part (a) 1. (a.) Explain the concept of concentration ratio and how it is used to identify an oligopoly.

2. (a.) Explain the incentives behind a ca el mo i e o chea 3. (a.)E

lain he e m aci coll ion

Paper 1: Essay Questions, Part (a) and Part (b) 1. (a.) Using examples, describe the assumed characteristics of an oligopoly market structure. (b.) Compare and contrast the market structures of oligopoly to those of perfect competition.

2. (a.) Explain what is meant by game theory. (b.) Discuss the role of interdependence faced by oligopolistic firms.

3. (a.) Explain that the behavior of firms in a non-collusive oligopoly is strategic. (b.) No ma e mo i a ed o chea

ha an one a

fi m in oligo ol

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be

a emen

207

Sources I am grateful for the work of my fellow IB Economics teachers Jocelyn Blink, Ian Dorton, Ellie Tragekes, and Jason Welker. Though they may not know it, each of them have accompanied me through my teaching of IB Economics over the years.

Thank you!

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