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== Review: Different Types of Markets ==

== Review: Different Types of Markets ==

About 20% of the exam is devoted to questions about different types of markets, ranging from the most advantageous for the public (perfect competition) to the least advantageous (monopoly).  The key to answering these questions correctly is to realize that the more competition there is, the lower the price of the goods and services and the lower the profits for the firms.

You instructor wonders what topic will maximize our marginal utility next.  About 20% of the exam is devoted to questions about different types of markets, ranging from the most advantageous for the public (perfect competition) to the least advantageous (monopoly).  That's a large chunk of questions, and with some extra review here we can probably convert wrong answers to right ones.

 

The key to answering these questions correctly is to realize that the more competition there is, the lower the price of the goods and services and the lower the profits for the firms.  Some of these questions are special cases and should simply be memorized:  a cartel is an oligopoly that illegally agrees to fix (set) its prices, and an oligopoly is an industry where just a few firms dominate the market.  When given a grid about where an oligopoly ends up selling its goods (its Nash Equilibrium), the answer is always symmetric (all firms sell at the same price) and usually not the highest price that a monopoly could sell at.

 

 

There can be general questions about these markets.  A perfectly competitive market uses resources in a perfectly efficient way.  At the other end of the spectrum, a monopoly uses resources the least efficiently of all.  Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus.  The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level.  This is bad for everyone, except the owner of the monopoly, who enriches himself.  This is how Bill Gates became the wealthiest person in the world.

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