AP Microeconomics — Unit 4: Imperfect Competition

What AP Microeconomics Unit 4 covers

The College Board Course and Exam Description breaks Unit 4 into 5 topics:

1. 4.1 Introduction to Imperfectly Competitive Markets
2. 4.2 Monopoly
3. 4.3 Price Discrimination
4. 4.4 Monopolistic Competition
5. 4.5 Oligopoly and Game Theory

AP Microeconomics Unit 4 practice questions

• A wheat farmer can't bump his price a single penny without losing every buyer. Why is his pricing power exactly zero while a monopolist's is total?

  Pricing power comes down to ONE thing: how many firms sell an identical product. The wheat farmer is one of thousands selling the exact same grain, so any price above market = zero sales. A monopolist is the only seller of something with no substitute, so buyers have nowhere else to go. More substitutes available to buyers = less pricing power for the seller.

• Why must an imperfectly competitive firm lower its price to sell more units?

  Because it faces a downward-sloping demand curve, so it must cut price. To sell more, it must lower the price on ALL units, not just the next one.

• A monopolist could sell one more unit at $50 that costs only $30 to make — pure surplus on the table. Why does it refuse to make it, and who loses?

  Selling it would force a price cut on every other unit. So it stops where P > MC, leaving valued trades unmade — deadweight loss.

• A monopoly is raking in economic profit. Profit usually screams 'come compete with me.' So why doesn't a flood of new firms show up and compete the profit away?

  Barriers to entry block them — patents, huge start-up costs, resource control. Without the wall, profit would lure entrants until economic profit hit zero.

• Your city has exactly one electric company. You can't switch. There's no competition. What market structure is this — and what gives this firm total pricing power?

  The only seller of a good with no close substitutes. Protected by high barriers, the firm is the market — a price maker.

• A monopolist finds that MR = MC at 500 units, where MC = $30. But the demand curve shows consumers will pay $50 at that quantity. What price does the monopolist charge — $30 or $50?

  Produce where MR = MC to find the quantity. Then go UP to the demand curve to find the price consumers will pay. The price is ABOVE MR (and above MC) — that's the source of monopoly profit and inefficiency.

• Why is MR less than price for a monopolist?

  To sell one more unit, it must cut the price on ALL units. Revenue from the new unit is offset by the cut on all previous units, so MR < P.

• A monopolist hits its profit-max quantity and stops. Society still loses something on the graph — a specific triangle. Where is it, and why does it exist?

  The triangle between demand and MC, monopoly to competitive Q. It's the lost surplus from units buyers valued above cost — deadweight loss.

+ 22 more AP Microeconomics cards in the app.

Key terms in Unit 4

These 10 terms show up in the Unit 4 cards. Each one links to its definition in the AP Microeconomics key-term reference.

• consumer surplus
• deadweight loss
• equilibrium
• game theory
• monopolistic competition
• monopoly
• oligopoly
• perfect competition
• substitute
• surplus