What happens when firms have market power. Monopoly pricing and deadweight loss, price discrimination, monopolistic competition and excess capacity, and how oligopolists behave when every firm's best move depends on what its rivals do.
Six ways to master Unit 4 — pick whichever fits how you like to study.
Five topics from the College Board CED, in order.
Unit 4 takes the MR = MC rule you learned in Unit 3 and applies it to firms that are not price takers. The moment a firm faces a downward-sloping demand curve, it must lower its price to sell another unit — and it lowers that price on every unit it sells. That single fact makes marginal revenue fall below price, and almost everything else in the unit follows from it.
Because MR < P, a firm with market power produces where MR = MC but charges the price read off the demand curve above that quantity. The result is P > MC, which means the market is allocatively inefficient — there are units consumers value more than they cost to make that simply don't get produced. That missing surplus is deadweight loss, and it is the central contrast with the perfectly competitive benchmark from Unit 3.
This unit runs about 15–22% of the AP Micro exam over roughly 18–20 class periods. Expect to draw the monopoly graph under pressure, shade deadweight loss correctly, distinguish the long-run monopolistically competitive equilibrium (tangency, excess capacity) from the perfectly competitive one, and solve a payoff matrix for dominant strategies and Nash equilibrium.