Adler University Exploring Monopolies and Oligopolies Discussion and Response

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Discussion 1: The Law of Demand
This week, we learned that the interaction of supply and demand determines prices and output levels in markets. Prices and output levels change when either the demand curve or the supply curve shifts. Sometimes price and output both increase and decrease. Sometimes one increases while the other decreases.

Consider a situation where the price of a good rises when output increases.?For example,?lithium is used in rechargeable batteries for computers,?phones,?other electronic goods,?and even certain cars.?Demand for lithium was low as recently as the early?2000s.?Since then,?both the price of lithium and the production of lithium have more than doubled.
Start your discussion by responding to these questions:

What could explain the simultaneous increases in the price of lithium and the production of lithium??Use supply and demand curves to explain your answer.
Hint:?Price and equilibrium quantity have both increased. Would a shift in the demand curve or a shift in the supply curve lead to this result?

Be sure to respond to at least one of your classmates’ posts. Was their reasoning similar to yours?

Discussion 2: Explore Cost and Competition

Watch the video, Revenues, Profits, and Price, to help you prepare for this week’s discussion:
Start your discussion by responding to this question using the company for which you currently work, a business with which you’re familiar, or the dream business you want to start:

What are some key fixed and variable costs for this business? Remember, fixed costs do not change when output changes. That is, fixed costs remain even if the company is producing nothing. Variable costs increase as output increases.

Be sure to respond to at least one of your classmates’ posts and share another idea for a type of cost.

Discussion 3: Exploring Monopolies and Oligopolies

Watch the video, Oligopolies and Monopolistic Competition, to help you prepare for this week’s discussion.
Start your discussion by responding to these questions using the company for which you currently work, a business with which you’re familiar, or a dream business you want to start:

With your selected business in mind, determine if it is competitive, monopolistic competitive, an oligopoly, or pure monopoly. Explain how you drew your conclusion about its market structure.
How does the business/firm in this industry determine the price it will charge for the products or services it sells?

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1/21/22, 8:42 PM
Ch. 9 Key Concepts and Summary – Principles of Economics 2e | OpenStax
9.1 How Monopolies Form: Barriers to Entry
Barriers to entry prevent or discourage competitors from entering the market. These barriers
include: economies of scale that lead to natural monopoly; control of a physical resource; legal
restrictions on competition; patent, trademark and copyright protection; and practices to
intimidate the competition like predatory pricing. Intellectual property refers to legally
guaranteed ownership of an idea, rather than a physical item. The laws that protect intellectual
property include patents, copyrights, trademarks, and trade secrets. A natural monopoly
arises when economies of scale persist over a large enough range of output that if one firm
supplies the entire market, no other firm can enter without facing a cost disadvantage.
9.2 How a Profit-Maximizing Monopoly Chooses Output
and Price
A monopolist is not a price taker, because when it decides what quantity to produce, it also
determines the market price. For a monopolist, total revenue is relatively low at low quantities
of output, because it is not selling much. Total revenue is also relatively low at very high
quantities of output, because a very high quantity will sell only at a low price. Thus, total
revenue for a monopolist will start low, rise, and then decline. The marginal revenue for a
monopolist from selling additional units will decline. Each additional unit a monopolist sells will
push down the overall market price, and as it sells more units, this lower price applies to
increasingly more units.
The monopolist will select the profit-maximizing level of output where MR = MC, and then
charge the price for that quantity of output as determined by the market demand curve. If that
price is above average cost, the monopolist earns positive profits.
Monopolists are not productively efficient, because they do not produce at the minimum of the
average cost curve. Monopolists are not allocatively efficient, because they do not produce at
the quantity where P = MC. As a result, monopolists produce less, at a higher average cost,
and charge a higher price than would a combination of firms in a perfectly competitive
industry. Monopolists also may lack incentives for innovation, because they need not fear
entry.
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1/21/22, 8:29 PM
Ch. 8 Key Concepts and Summary – Principles of Economics 2e | OpenStax
8.1 Perfect Competition and Why It Matters
A perfectly competitive firm is a price taker, which means that it must accept the equilibrium
price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny
amount more than the market price, it will be unable to make any sales. In a perfectly
competitive market there are thousands of sellers, easy entry, and identical products. A shortrun production period is when firms are producing with some fixed inputs. Long-run
equilibrium in a perfectly competitive industry occurs after all firms have entered and exited
the industry and seller profits are driven to zero.
Perfect competition means that there are many sellers, there is easy entry and exiting of firms,
products are identical from one seller to another, and sellers are price takers.
8.2 How Perfectly Competitive Firms Make Output
Decisions
As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily
increases at a constant rate determined by the given market price. Profits will be highest (or
losses will be smallest) at the quantity of output where total revenues exceed total costs by
the greatest amount (or where total revenues fall short of total costs by the smallest amount).
Alternatively, profits will be highest where marginal revenue, which is price for a perfectly
competitive firm, is equal to marginal cost. If the market price faced by a perfectly competitive
firm is above average cost at the profit-maximizing quantity of output, then the firm is making
profits. If the market price is below average cost at the profit-maximizing quantity of output,
then the firm is making losses.
If the market price is equal to average cost at the profit-maximizing level of output, then the
firm is making zero profits. We call the point where the marginal cost curve crosses the
average cost curve, at the minimum of the average cost curve, the “zero profit point.” If the
market price that a perfectly competitive firm faces is below average variable cost at the
profit-maximizing quantity of output, then the firm should shut down operations immediately. If
the market price that a perfectly competitive firm faces is above average variable cost, but
below average cost, then the firm should continue producing in the short run, but exit in the
long run. We call the point where the marginal cost curve crosses the average variable cost
curve the shutdown point.
8.3 Entry and Exit Decisions in the Long Run
In the long run, firms will respond to profits through a process of entry, where existing firms
expand output and new firms enter the market. Conversely, firms will react to losses in the
long run through a process of exit, in which existing firms cease production altogether.
Through the process of entry in response to profits and exit in response to losses, the price
level in a perfectly competitive market will move toward the zero-profit point, where the
marginal cost curve crosses the AC curve at the minimum of the average cost curve.
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1/21/22, 8:29 PM
Ch. 8 Key Concepts and Summary – Principles of Economics 2e | OpenStax
The long-run supply curve shows the long-run output supplied by firms in three different types
of industries: constant cost, increasing cost, and decreasing cost.
8.4 Efficiency in Perfectly Competitive Markets
Long-run equilibrium in perfectly competitive markets meets two important conditions:
allocative efficiency and productive efficiency. These two conditions have important
implications. First, resources are allocated to their best alternative use. Second, they provide
the maximum satisfaction attainable by society.
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1/21/22, 8:42 PM
Ch. 10 Key Concepts and Summary – Principles of Economics 2e | OpenStax
10.1 Monopolistic Competition
Monopolistic competition refers to a market where many firms sell differentiated products.
Differentiated products can arise from characteristics of the good or service, location from
which the firm sells the product, intangible aspects of the product, and perceptions of the
product.
The perceived demand curve for a monopolistically competitive firm is downward-sloping,
which shows that it is a price maker and chooses a combination of price and quantity.
However, the perceived demand curve for a monopolistic competitor is more elastic than the
perceived demand curve for a monopolist, because the monopolistic competitor has direct
competition, unlike the pure monopolist. A profit-maximizing monopolistic competitor will seek
out the quantity where marginal revenue is equal to marginal cost. The monopolistic
competitor will produce that level of output and charge the price that the firm’s demand curve
indicates.
If the firms in a monopolistically competitive industry are earning economic profits, the
industry will attract entry until profits are driven down to zero in the long run. If the firms in a
monopolistically competitive industry are suffering economic losses, then the industry will
experience exit of firms until economic losses are driven up to zero in the long run.
A monopolistically competitive firm is not productively efficient because it does not produce at
the minimum of its average cost curve. A monopolistically competitive firm is not allocatively
efficient because it does not produce where P = MC, but instead produces where P > MC.
Thus, a monopolistically competitive firm will tend to produce a lower quantity at a higher cost
and to charge a higher price than a perfectly competitive firm.
Monopolistically competitive industries do offer benefits to consumers in the form of greater
variety and incentives for improved products and services. There is some controversy over
whether a market-oriented economy generates too much variety.
10.2 Oligopoly
An oligopoly is a situation where a few firms sell most or all of the goods in a market.
Oligopolists earn their highest profits if they can band together as a cartel and act like a
monopolist by reducing output and raising price. Since each member of the oligopoly can
benefit individually from expanding output, such collusion often breaks down—especially
since explicit collusion is illegal.
The prisoner’s dilemma is an example of the application of game theory to analysis of
oligopoly. It shows how, in certain situations, all sides can benefit from cooperative behavior
rather than self-interested behavior. However, the challenge for the parties is to find ways to
encourage cooperative behavior.
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1/21/22, 8:40 PM
Ch. 11 Key Concepts and Summary – Principles of Economics 2e | OpenStax
11.1 Corporate Mergers
A corporate merger involves two private firms joining together. An acquisition refers to one firm
buying another firm. In either case, two formerly independent firms become one firm. Antitrust
laws seek to ensure active competition in markets, sometimes by preventing large firms from
forming through mergers and acquisitions, sometimes by regulating business practices that
might restrict competition, and sometimes by breaking up large firms into smaller competitors.
A four-firm concentration ratio is one way of measuring the extent of competition in a market.
We calculate it by adding the market shares—that is, the percentage of total sales—of the four
largest firms in the market. A Herfindahl-Hirschman Index (HHI) is another way of measuring
the extent of competition in a market. We calculate it by taking the market shares of all firms in
the market, squaring them, and then summing the total.
The forces of globalization and new communications and information technology have
increased the level of competition that many firms face by increasing the amount of
competition from other regions and countries.
11.2 Regulating Anticompetitive Behavior
Antitrust firms block authorities from openly colluding to form a cartel that will reduce output
and raise prices. Companies sometimes attempt to find other ways around these restrictions
and, consequently, many antitrust cases involve restrictive practices that can reduce
competition in certain circumstances, like tie-in sales, bundling, and predatory pricing.
11.3 Regulating Natural Monopolies
In the case of a natural monopoly, market competition will not work well and so, rather than
allowing an unregulated monopoly to raise price and reduce output, the government may wish
to regulate price and/or output. Common examples of regulation are public utilities, the
regulated firms that often provide electricity and water service.
Cost-plus regulation refers to government regulating a firm which sets the price that a firm can
charge over a period of time by looking at the firm’s accounting costs and then adding a
normal rate of profit. Price cap regulation refers to government regulation of a firm where the
government sets a price level several years in advance. In this case, the firm can either earn
high profits if it manages to produce at lower costs or sell a higher quantity than expected or
suffer low profits or losses if costs are high or it sells less than expected.
11.4 The Great Deregulation Experiment
The U.S. economy experienced a wave of deregulation in the late 1970s and early 1980s,
when the government eliminated a number of regulations that had set prices and quantities
produced in a number of industries. Major accounting scandals in the early 2000s and, more
recently, the Great Recession have spurred new regulation to prevent similar occurrences in
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1/21/22, 8:40 PM
Ch. 11 Key Concepts and Summary – Principles of Economics 2e | OpenStax
the future. Regulatory capture occurs when the regulated industries end up having a strong
influence over what regulations exist.
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1/21/22, 8:29 PM
Ch. 7 Key Concepts and Summary – Principles of Economics 2e | OpenStax
7.1 Explicit and Implicit Costs, and Accounting and
Economic Profit
Privately owned firms are motivated to earn profits. Profit is the difference between revenues
and costs. While accounting profit considers only explicit costs, economic profit considers
both explicit and implicit costs.
7.2 Production in the Short Run
Production is the process a firm uses to transform inputs (e.g. labor, capital, raw materials,
etc.) into outputs. It is not possible to vary fixed inputs (e.g. capital) in a short period of time.
Thus, in the short run the only way to change output is to change the variable inputs (e.g.
labor). Marginal product is the additional output a firm obtains by employing more labor in
production. At some point, employing additional labor leads to diminishing marginal
productivity, meaning the additional output obtained is less than for the previous increment to
labor. Mathematically, marginal product is the slope of the total product curve.
7.3 Costs in the Short Run
For every input (e.g. labor), there is an associated factor payment (e.g. wages and salaries).
The cost of production for a given quantity of output is the sum of the amount of each input
required to produce that quantity of output times the associated factor payment.
In a short-run perspective, we can divide a firm’s total costs into fixed costs, which a firm must
incur before producing any output, and variable costs, which the firm incurs in the act of
producing. Fixed costs are sunk costs; that is, because they are in the past and the firm
cannot alter them, they should play no role in economic decisions about future production or
pricing. Variable costs typically show diminishing marginal returns, so that the marginal cost of
producing higher levels of output rises.
We calculate marginal cost by taking the change in total cost (or the change in variable cost,
which will be the same thing) and dividing it by the change in output, for each possible change
in output. Marginal costs are typically rising. A firm can compare marginal cost to the
additional revenue it gains from selling another unit to find out whether its marginal unit is
adding to profit.
We calculate average total cost by taking total cost and dividing by total output at each
different level of output. Average costs are typically U-shaped on a graph. If a firm’s average
cost of production is lower than the market price, a firm will be earning profits.
We calculate average variable cost by taking variable cost and dividing by the total output at
each level of output. Average variable costs are typically U-shaped. If a firm’s average variable
cost of production is lower than the market price, then the firm would be earning profits if fixed
costs are left out of the picture.
7.4 Production in the Long Run
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1/21/22, 8:29 PM
Ch. 7 Key Concepts and Summary – Principles of Economics 2e | OpenStax
In the long run, all inputs are variable. Since diminishing marginal productivity is caused by
fixed capital, there are no diminishing returns in the long run. Firms can choose the optimal
capital stock to produce their desired level of output.
7.5 Costs in the Long Run
A production technology refers to a specific combination of labor, physical capital, and
technology that makes up a particular method of production.
In the long run, firms can choose their production technology, and so all costs become
variable costs. In making this choice, firms will try to substitute relatively inexpensive inputs for
relatively expensive inputs where possible, so as to produce at the lowest possible long-run
average cost.
Economies of scale refers to a situation where as the level of output increases, the average
cost decreases. Constant returns to scale refers to a situation where average cost does not
change as output increases. Diseconomies of scale refers to a situation where as output
increases, average costs also increase.
The long-run average cost curve shows the lowest possible average cost of production,
allowing all the inputs to production to vary so that the firm is choosing its production
technology. A downward-sloping LRAC shows economies of scale; a flat LRAC shows
constant returns to scale; an upward-sloping LRAC shows diseconomies of scale. If the longrun average cost curve has only one quantity produced that results in the lowest possible
average cost, then all of the firms competing in an industry should be the same size. However,
if the LRAC has a flat segment at the bottom, so that a firm can produce a range of different
quantities at the lowest average cost, the firms competing in the industry will display a range
of sizes. The market demand in conjunction with the long-run average cost curve determines
how many firms will exist in a given industry.
If the quantity demanded in the market of a certain product is much greater than the quantity
found at the bottom of the long-run average cost curve, where the cost of production is
lowest, the market will have many firms competing. If the quantity demanded in the market is
less than the quantity at the bottom of the LRAC, there will likely be only one firm.
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1/21/22, 8:26 PM
Ch. 3 Key Concepts and Summary – Principles of Economics 2e | OpenStax
3.1 Demand, Supply, and Equilibrium in Markets for Goods
and Services
A demand schedule is a table that shows the quantity demanded at different prices in the
market. A demand curve shows the relationship between quantity demanded and price in a
given market on a graph. The law of demand states that a higher price typically leads to a
lower quantity demanded.
A supply schedule is a table that shows the quantity supplied at different prices in the market.
A supply curve shows the relationship between quantity supplied and price on a graph. The
law of supply says that a higher price typically leads to a higher quantity supplied.
The equilibrium price and equilibrium quantity occur where the supply and demand curves
cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied.
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity
supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level,
then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will
exist. In either case, economic pressures will push the price toward the equilibrium level.
3.2 Shifts in Demand and Supply for Goods and Services
Economists often use the ceteris paribus or “other things being equal” assumption: while
examining the economic impact of one event, all other factors remain unchanged for analysis
purposes. Factors that can shift the demand curve for goods and services, causing a different
quantity to be demanded at any given price, include changes in tastes, population, income,
prices of substitute or complement goods, and expectations about future conditions and
prices. Factors that can shift the supply curve for goods and services, causing a different
quantity to be supplied at any given price, include input prices, natural conditions, changes in
technology, and government taxes, regulations, or subsidies.
3.3 Changes in Equilibrium Price and Quantity: The FourStep Process
When using the supply and demand framework to think about how an event will affect the
equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand
diagram to think about what the market looked like before the event; (2) decide whether the
event will affect supply or demand; (3) decide whether the effect on supply or demand is
negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare
the new equilibrium price and quantity to the original ones.
3.4 Price Ceilings and Price Floors
Price ceilings prevent a price from rising above a certain level. When a price ceiling is set
below the equilibrium price, quantity demanded will exceed quantity supplied, and excess
demand or shortages will result. Price floors prevent a price from falling below a certain level.
When a price floor is set above the equilibrium price, quantity supplied will exceed quantity
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Ch. 3 Key Concepts and Summary – Principles of Economics 2e | OpenStax
demanded, and excess supply or surpluses will result. Price floors and price ceilings often
lead to unintended consequences.
3.5 Demand, Supply, and Efficiency
Consumer surplus is the gap between the price that consumers are willing to pay, based on
their preferences, and the market equilibrium price. Producer surplus is the gap between the
price for which producers are willing to sell a product, based on their costs, and the market
equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total
surplus is larger at the equilibrium quantity and price than it will be at any other quantity and
price. Deadweight loss is loss in total surplus that occurs when the economy produces at an
inefficient quantity.
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Discussion 1: The Law of Demand
Dinish Lattimore
RE: Week 2 Discussion
Hello everyone,
Supply and demand is the amount of goods and services that are available for people to buy compared to the
amount of goods and services that people want to buy if less of a product. In my opinion the prices increases
because the demand for lithium increased. Once technology upgraded and started making more products the
demand for other items and accessories will increase. There was already a set price for lithium when it was
sold. But once people start buying a item/s it will increase the amount of goods or services they need. I feel a
shift in demand will curve a shift in supply. It will increase the demand and decrease the supply. So the
creator or owner will have to create more goods to be sold. But when that happens the prices may shift as
well. Supply and demand go hand and hand, and once you get a understanding of the process you will
understand it better. I hope you all enjoyed your weekend and are staying healthy through the pandemic.
Discussion 2: Explore Cost and Competition
Kimberly Sermon
RE: Week 3 Discussion
Good day Professor and classmates,
I own a management/ marketing company. We specialize in product development and management. My fixed
costs are rent and the internet. I also consider my digital marketing a fixed cost. I have to maintain those fixed
costs in order to operate. Those costs do not change. First, the goal is to do what it takes to keep the doors
open. My variable costs would be the production costs. The more products I purchase, the more I can save.
Shipping fees are also a variable cost; the pricing fluctuates depending on the weight, size, and destination.
Production supplies would include tools to cleaning supplies.

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