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

Unit 4 Visual Review

An 8-slide visual review of Imperfect Competition — the monopoly graph, deadweight loss, price discrimination, excess capacity, and payoff matrices, built right into the page.

8 slides
Diagram walkthrough
Keyboard navigation
College Board aligned
← Back to Unit 4 hub
UNIT 4 · SLIDE 1 The Market Structure Spectrum Four market structures, ordered by how much power one firm has MORE COMPETITIVE MORE MARKET POWER Perfect Competition Very many firms Identical product Free entry Monopolistic Comp. Many firms Differentiated Free entry Oligopoly A few firms Either Barriers exist Monopoly One firm No substitutes Entry blocked The dividing line Perfect competition is the ONLY structure where the firm's demand curve is horizontal (perfectly elastic). Everywhere else demand slopes down, so the firm must cut price to sell more — which drags MR below price. Units 4 covers the right-hand three structures. Barriers to entry • Control of a key resource • Government licence, patent, or franchise • Very large start-up / fixed costs • Economies of scale (→ natural monopoly) Barriers are what let profit survive the long run. Market power grows left to right — and with it, the gap between price and marginal cost. The Review Hub · AP Microeconomics Unit 4
Unit 4 covers the three structures on the right. What unites them is a downward-sloping demand curve: each firm must cut its price to sell more, which is exactly what perfect competition never requires.
UNIT 4 · SLIDE 2 Why Marginal Revenue Falls Below Price Price / Revenue Quantity D MR Same intercept ½ Q Q Why MR falls below price To sell the 4th unit you must drop the price — and you drop it on units 1, 2 and 3 as well. MR = (price of new unit) − (revenue lost on the rest) The linear-demand shortcut MR shares demand's vertical intercept and has TWICE the slope → hits the axis at ½Q. Elasticity link MR > 0 where demand is elastic; MR < 0 where inelastic. MR < P is the mechanical fact that drives every result in this unit. The Review Hub · AP Microeconomics Unit 4
Selling one more unit means cutting the price on every unit. The gain on the new unit is offset by revenue lost on the rest, so MR lies below price — and for linear demand, MR falls twice as fast.
UNIT 4 · SLIDE 3 The Monopoly Graph and Deadweight Loss Price Quantity D MR MC Qm Pm Qe DWL The two-step rule 1. Find Q where MR = MC. 2. Go UP to DEMAND to read the price. Never read price off the MR curve — this is the most commonly lost point in the whole unit. Deadweight loss Between Qm and Qe, buyers value units more than they cost (D above MC) — but they go unmade. Profit is NOT guaranteed If ATC sits above D at Qm, the monopolist loses money. Quantity from MR = MC. Price from DEMAND. Getting this backwards is the costliest error in Unit 4. The Review Hub · AP Microeconomics Unit 4
The monopolist produces Qm where MR = MC, then charges Pm off the demand curve. Because P > MC, output stops short of the efficient Qe, and the shaded triangle is the surplus society loses.
UNIT 4 · SLIDE 4 Regulating a Natural Monopoly Price / Cost Quantity D ATC MC Fair return: P = ATC Socially optimal: P = MC Socially optimal price — P = MC Allocatively efficient: output reaches Qe and deadweight loss is zero. But for a natural monopoly MC < ATC, so the firm LOSES money → needs a subsidy. Fair-return price — P = ATC Zero economic profit: the firm covers every cost, including opportunity cost, with no subsidy needed. Still P > MC, so some deadweight loss survives. What makes it 'natural' ATC falls across the whole relevant range, so ONE firm serves the market more cheaply than several could. Efficient pricing loses money; break-even pricing isn't efficient. Regulators must pick a trade-off. The Review Hub · AP Microeconomics Unit 4
When ATC falls across the whole market, one firm is cheapest — a natural monopoly. Setting P = MC is efficient but loss-making, since MC sits below ATC. Setting P = ATC breaks even but leaves P > MC.
UNIT 4 · SLIDE 5 Price Discrimination Price Quantity D = MR MC ALL surplus → the firm Qe Three conditions required 1. Market power (downward-sloping demand) 2. Can separate buyers by willingness to pay 3. Can prevent resale between them Perfect price discrimination Each buyer pays exactly their willingness to pay, so the firm never cuts price on earlier units: MR = D. Output runs all the way to where D = MC. The strange result Consumer surplus = 0, yet deadweight loss = 0 too. Efficient and completely unequal at the same time. Perfect price discrimination is the one case where market power produces an efficient quantity. The Review Hub · AP Microeconomics Unit 4
With market power, separable buyers, and no resale, a firm can charge each buyer their willingness to pay. Then MR = D, output reaches the efficient level, and deadweight loss vanishes — but consumers keep none of the surplus.
UNIT 4 · SLIDE 6 Monopolistic Competition: Short Run vs Long Run SHORT RUN LONG RUN Price / Cost Quantity D ATC PROFIT Price / Cost Quantity D ATC tangency → zero profit Q min ATC excess capacity Profit attracts entry → each firm's demand shrinks. Free entry kills profit here, exactly as in perfect competition — but leaves excess capacity behind. The Review Hub · AP Microeconomics Unit 4
Short-run profit attracts entry, which shrinks each firm's demand until it is just tangent to ATC — zero economic profit. Because tangency lands left of minimum ATC, the firm carries permanent excess capacity.
UNIT 4 · SLIDE 7 Oligopoly and the Payoff Matrix Two firms choose Cheat or Collude. Payoffs: (Firm A, Firm B) FIRM B Collude Cheat FIRM A Collude Cheat $8, $8 $2, $10 $10, $2 $5, $5 NASH EQUILIBRIUM How to solve it For each rival move, mark the player's best payoff. Where BOTH are best-responding → Nash equilibrium. Why cartels break down Cheating pays no matter what the rival does, so it is a dominant strategy — both cheat and both end up worse. Cheating is the dominant strategy for both firms, so the cartel collapses into the worse outcome. The Review Hub · AP Microeconomics Unit 4
Both firms would earn $8 by colluding, but each earns more by cheating regardless of the rival's move. The Nash equilibrium is mutual cheating at $5 each — individually rational, jointly worse.
UNIT 4 · SLIDE 8 Unit 4 in One Screen Compare the four structures Perfect competition: P = MC, min ATC, zero LR profit Monopolistic comp.: P > MC, excess capacity, zero LR profit Oligopoly: P > MC, strategic, profit can persist Monopoly: P > MC, deadweight loss, profit persists Only perfect competition is fully efficient. The graphing checklist ☐ MR below D, twice the slope ☐ Quantity where MR = MC ☐ Price read UP on demand ☐ Profit box between P and ATC ☐ DWL triangle out to where D meets MC Long-run profit: who keeps it? Entry is the whole story. Where entry is free (monopolistic competition), profit is competed to zero. Where barriers block entry (monopoly, often oligopoly), economic profit can survive indefinitely. Zero profit ≠ efficient — check P vs MC separately. Fast self-test • Why is MR below price? • Where do I read the monopoly price? • What does excess capacity look like? • How do I spot a Nash equilibrium? If all four are instant, this unit is exam-ready. Unit 4 is 15–22% of the exam — the monopoly graph and payoff matrix are near-certain appearances. The Review Hub · AP Microeconomics Unit 4
Everything Unit 4 tests: the structure spectrum, the two-step monopoly rule, the long-run entry logic, and game theory. If you can sketch the monopoly graph and shade deadweight loss from memory, you're in good shape.
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How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 4.