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Consumer Surplus

The result of a consumer being able to buy the product at the equilibrium price when that price is below what the consumer would be willing to pay for the product

Kinked-demand Curve

The demand curve facing a firm in a non-collusive oligopoly that is based on the assumption that competitors will not follow a price increase and will follow a price decrease

Monopolistic Competition

The market structure characterized by many small sellers who produce differentiated products. The firm has some degree of control over product price

Non-price Competition

Competition that is based upon advertising and distinguishing features of a differentiated product


The market structure characterized by a few large firms that produce either standardized or differentiated product, where entry into the industry is difficult, and where there is a great deal of interdependence between the decisions made by the firms

Perfect Elastic Demand

The demand for the product is perfectly responsive to a price change and suggests that the producer can sell whatever amount they wish at that price

Perfectly Elastic Demand Curve

A curve that is horizontal at the market price

Price Discrimination

The practice of selling a product or service at different prices to different consumers when those price differences are not justified by cost differences. It can occur when different consumers have different elasticities of demand for the product

Price Wars

Successive rounds of price cutting by firms in an attempt to maintain market share

Producer Surplus

A situation that exists when producers are able to sell their product above the price they would have been willing to accept

Pure (Perfect) Competition

The market structure characterized by a large number of sellers producing a standardized product with easy entry and exit into and out of the industry, and information that is free and readily available. The seller has no ability to influence and product price

Pure Monopoly

The market structure within the industry consisting of one firm producing a unique product. The firm tends to have a significant amount of pricing power and control over the supply of the product

Assumptions of Perfect Competition

There are many small independently acting buyers and seller, firms produce standardized or homogeneous products, each firm produces small portion of total output, there is free entry into and exit from industry, no legal, technological or financial barriers, information is free and readily available, firms face a perfectly elastic demand curve, price = average revenue = marginal revenue, firms make economic profit and there is an incentive for new firms to enter the market

Assumptions or monopolistic competition

There are a relatively large number of independent and small buyers and sellers, there is free entry and exit from the industry, firms are producing differentiated products

Characteristics of monopolistic competition

The firm faces a downward-sloping demand curve and a marginal revenue is less than price, there tends to be significant use of advertising as a form of non-price competition, product differentiation lead the firm competing on quality, price, and marketing, firms can make an economic profit in the short-run, the existence of economic profit provides an incentive for firms to enter the industry, entry will continue until economic profit disappears

Assumptions of Oligopoly

There are a small number of relatively large firms, firms may produce either a standardized or differentiated product, firms in the industry are interdependent, firms tend to engage in non-price competition

Characteristics of oligopoly

Firms face a downward sloping demand curve and have some degree of control over prices, there generally are barriers to the entry for new firms into the industry, including economies of scale, and ownership of raw materials, patents brands, firms can benefit from collusion

Characteristics of kinked demand

A firm will not gain market share by lowering prices and thus revenue would fall, a firm would lose market share if it raises prices, and thus revenue would falls, if competitors fail to understand this logic, there is a strong possibility of price wars and advertising wars

Price Leadership

Another form of competition in oligopoly, it often results in an implicit agreement that coordinates prices without having the firms engage in illegal collusion which include, infrequent price changes, potential impending price changes are announced by price leader, goal is not to maximize short-term profit but rather to discourage the entry of new firms

Characteristics of a monopoly

The monopolist has strong barriers to entry, faces a downward sloping demand curve with marginal revenue less than price, may have its monopoly position derived from government action, will tend to set price in the elastic range of their demand curve, tends to have less incentive to innovate and improve efficiency

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