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Unit 4: Imperfect Competition

5 dot points across 5 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

What separates imperfectly competitive firms from price takers, and why does market power create inefficiency?

Topic 4.1 Introduction to Imperfectly Competitive Markets: compare the four market structures, explain why a price maker faces a downward-sloping demand curve with marginal revenue below price, and define barriers to entry.
A focused answer to AP Microeconomics Topic 4.1, comparing the four market structures, explaining why a price maker faces a downward-sloping demand curve with marginal revenue below price, defining market power and barriers to entry, and previewing the inefficiency of imperfect competition, with worked exam-style questions.
9 min answer →

Why do many differentiated firms earn profit in the short run but only normal profit in the long run, with excess capacity?

Topic 4.4 Monopolistic Competition: describe the structure, find short-run profit or loss, explain the long-run zero-economic-profit outcome from entry and exit, and explain excess capacity and inefficiency.
A focused answer to AP Microeconomics Topic 4.4, covering the characteristics of monopolistic competition, the firm's short-run profit and loss, the long-run zero-economic-profit equilibrium from free entry and exit, excess capacity, and why the structure is not productively or allocatively efficient, with worked exam-style questions.
10 min answer →

How does a single seller choose price and output, and why is monopoly inefficient compared with perfect competition?

Topic 4.2 Monopoly: find the monopolist's profit-maximizing price and output using marginal revenue equals marginal cost, measure profit or loss, identify the deadweight loss, and explain natural monopoly and regulation.
A focused answer to AP Microeconomics Topic 4.2, covering how a monopolist chooses output where marginal revenue equals marginal cost and reads price off the demand curve, measures profit, creates deadweight loss, sustains long-run profit behind barriers, and how natural monopoly and price regulation work, with worked exam-style questions.
12 min answer →

How do a few interdependent firms behave, and how does game theory predict their choices?

Topic 4.5 Oligopoly and Game Theory: describe oligopoly and interdependence, analyze a payoff matrix to find dominant strategies and Nash equilibrium, and explain collusion, cartels, and the incentive to cheat.
A focused answer to AP Microeconomics Topic 4.5, covering oligopoly and interdependence, reading a payoff matrix, finding dominant strategies and the Nash equilibrium, the prisoners' dilemma, and collusion, cartels, and the incentive to cheat, with worked exam-style questions.
11 min answer →

How can a firm charge different prices to different buyers, and what does perfect price discrimination do to surplus?

Topic 4.3 Price Discrimination: state the conditions for price discrimination, and analyze perfect (first-degree) price discrimination, including its effect on output, profit, consumer surplus, and deadweight loss.
A focused answer to AP Microeconomics Topic 4.3, covering the conditions required for price discrimination and the effects of perfect (first-degree) price discrimination on output, the absence of deadweight loss, the elimination of consumer surplus, and the rise in producer surplus, with worked exam-style questions.
9 min answer →