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Unit 4 · Imperfect Competition Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice
Unit 4 Essentials

Unit 4 Essentials

The 3 big ideas behind Imperfect Competition, plus a searchable glossary of all 25 vocabulary terms you need for the exam.

3 big ideas
25 key terms
Searchable glossary
College Board aligned
← Back to Unit 4 hub
Big Idea 1
A downward-sloping demand curve is what makes MR fall below price
Every firm in Unit 4 — monopoly, monopolistic competitor, oligopolist — must lower its price to sell another unit, and it lowers that price on every unit sold. The revenue gained on the new unit is partly offset by revenue lost on the earlier ones, so marginal revenue always lies below price. This one mechanical fact explains monopoly pricing, deadweight loss, and why these firms never produce where P = MC.
Market Power MR < P Demand
Big Idea 2
MR = MC still finds the quantity; demand still sets the price
The profit-maximizing rule does not change from Unit 3. What changes is the second step: after locating the quantity where MR = MC, you must go up to the DEMAND curve to read the price. Reading the price off the MR curve is the single most common graphing error on the exam.
Profit Maximization MR=MC Graphing
Big Idea 3
Market power trades efficiency for profit — and sometimes for variety
Because P > MC, every imperfectly competitive market produces less than the allocatively efficient quantity, creating deadweight loss. Monopoly can sustain that profit behind barriers to entry; monopolistic competition cannot, so entry drives profit to zero and leaves excess capacity instead. The compensation consumers receive is product variety.
Efficiency Deadweight Loss Excess Capacity
Market power
The ability of a firm to influence the price of its product by changing the quantity it sells.
Market Structure
Barrier to entry
Anything that prevents new firms from entering a market, such as patents, licences, resource control, or large economies of scale.
Market Structure
Product differentiation
Making a product distinct from rivals' products in real or perceived ways, giving the firm some market power.
Market Structure
Price maker
A firm that faces a downward-sloping demand curve and therefore chooses its price, unlike a price taker.
Market Structure
Concentration ratio
The share of total market sales accounted for by the largest few firms — a rough measure of how concentrated a market is.
Market Structure
Monopoly
A market with a single seller of a product that has no close substitutes, protected by significant barriers to entry.
Monopoly
Marginal revenue (MR)
The change in total revenue from selling one more unit. For any firm with market power, MR is less than price.
Monopoly
Natural monopoly
A market in which one firm can serve the entire market at lower average cost than several firms could, because economies of scale persist throughout.
Monopoly
Deadweight loss
The loss of total surplus caused by producing less than the allocatively efficient quantity — the triangle between demand and MC from the actual quantity to the efficient one.
Monopoly
Socially optimal price
The regulated price set where P = MC, achieving allocative efficiency but often causing a loss for a natural monopoly.
Monopoly
Fair-return price
The regulated price set where P = ATC, giving the firm zero economic profit.
Monopoly
Price discrimination
Charging different buyers different prices for the same good for reasons unrelated to cost.
Price Discrimination
Perfect price discrimination
Charging each buyer exactly their willingness to pay, which eliminates consumer surplus and deadweight loss simultaneously.
Price Discrimination
Resale (arbitrage)
Buying at a low price and reselling at a higher one. A firm must prevent resale for price discrimination to work.
Price Discrimination
Monopolistic competition
A market with many firms selling differentiated products, with easy entry and exit.
Monopolistic Competition
Excess capacity
Producing at a quantity below minimum ATC, so per-unit cost is higher than it needs to be — the long-run outcome in monopolistic competition.
Monopolistic Competition
Tangency condition
In long-run monopolistic competition, the demand curve just touches the ATC curve at the profit-maximizing quantity, so economic profit is zero.
Monopolistic Competition
Oligopoly
A market dominated by a few large, interdependent firms.
Oligopoly & Game Theory
Mutual interdependence
The condition in which each firm's best decision depends on what its rivals decide.
Oligopoly & Game Theory
Collusion
An agreement among firms to restrict output and raise price, acting jointly like a monopolist.
Oligopoly & Game Theory
Cartel
A formal collusive agreement. Cartels are inherently unstable because each member gains by cheating.
Oligopoly & Game Theory
Payoff matrix
A table showing the payoffs to each player for every combination of strategies.
Oligopoly & Game Theory
Dominant strategy
A strategy that is best for a player regardless of what the other player does.
Oligopoly & Game Theory
Nash equilibrium
An outcome where no player can do better by unilaterally changing strategy.
Oligopoly & Game Theory
Prisoner's dilemma
A game where individually rational choices lead both players to a worse outcome than cooperation would produce.
Oligopoly & Game Theory