Economics Part 3-unit 4 Homework Recommended Sequence Instruction Teach Perfect Competition This

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Teaching Unit IV. Market Structures: Price Takers & Price Searchers. The fourth unit of in-

struction entails the content areas of Nature and Functions of Product Markets, as detailed in the

AP* Economics Course Description1 (Content Area II, D and Content Area IV, C)

NOTE: Teachers may wish to break this teaching unit into three discrete teaching modules; (1)

Perfect Competition, referred to in this text as Price Takers; (2) Imperfect Competition or Monop-

olistic Competition, referred to in this text as Price Searchers With Low Barriers; and (3) Monop-

oly, referred to in this text as Price Searcher Markets With High Barriers)

I. Plan NOTE: Chapters and pages in (parenthesis) denote reference for the split text in Micro

Economics

Teaching Materials

Instructors Manual Text readings

Price Takers and the Competitive Process

Chapter 22 (9)

Chapter 22 (9), Price-Takers and the

Competitive Process

Price Searcher Markets With Low Entry

Barriers

Chapter 22 (10)

Chapter 22 (10), Price Searchers with

Low Entry Barriers

Price Searcher Markets With High Entry

Barriers

Chapter 23 (11)

Chapter 23 (11), Price Searchers with

High Entry Barriers

Key instructional objectives: Students do the following

Objectives related to perfect competition (Price-Takers and the Competitive Process)

2. define and differentiate between an industry and a single firm

4. define and distinguish between short-run and long-run equilibrium.

6. describe and construct the long-run market supply curve in the case of a purely competitive

market for a constant cost and increasing cost market

358 Part 3/Unit IV

Computational & graphing skills (Price-Takers and Competitive Process): Students must

complete these tasks

1. Differentiate between the demand in a competitive industry (market) and a competitive

firm.

3. Graph a perfectly competitive firm in long-run equilibrium.

5. Graph a long-run adjustment given an increase/decrease in demand for a product.

7. Show how changes in supply and demand affect a competitive firm in the short-run

and long-run.

Formative Signals: The following content and skill areas related to the perfect competition mar-

ket structure have been identified as areas of weakness for students based upon past objective and

free response examinations.

Objective Formative Signals: Based upon

the released objective AP* Micro Economics

examinations, less than 50% of the students

have been able to correctly answer questions

to following

Free response Formative Signals: Past stu–

dents have found these to be problematic areas

determine the relationship between price

and total revenue for a competitive firm.

determine a course of action for a profit-

maximizing perfectly competitive firm op-

erating at a point where p > MC.

determine changes in output and price

fected).

the elasticity of supply for perfectly com-

know and distinguish between allocative

efficiency (p=mc) and technological (pro-

ductive) efficiency (p=min ATC)

differentiate between short-run and long-

run equilibrium in competitive model

LR = p=mc=min ATC

firm and industry.

explain the short-run impact of an in-

Part 3/Unit IV 359

II. Teach Perfect (Pure) Competition Model

Recommended sequence of instruction: Teach perfect competition in this sequence

Chapter 22 (9)

Price Takers and the Competitive Process

1. PRICE TAKERS AND PRICE SEARCHERS, P. 440 (P. 172)

Price taker versus price searcher

2. WHAT ARE THE CHARACTERISTICS OF PRICE TAKER MARKETS? P. 441 (P. 173)

-maximizing choices; derive its supply curve.

Definition

3. HOW DOES THE PRICE TAKER MAXIMIZE PROFITS? P. 442 (P. 174)

4. THE FIRM’S SHORT-RUN SUPPLY CURVE, P. 446 (P. 178)

5. THE SHORT-RUN MARKET SUPPLY CURVE, P. 447 (P. 179)

Explain how output, price, and profit are determined in the short-run

6. THE ROLE OF PROFITS AND LOSSES, P. 453 (P. 185)

Explain how output, price, and profit are determined in the long-run.

Exit/Entry

7. COMPETITION PROMOTES PROSPERITY, P. 454 (P. 186)

Key conceptual questions: Students demonstrate their understanding of the material by answer-

ing the following key conceptual questions

1. Why are economic profits a better basis for decision-making than accounting profits?

2. How do firms apply the principle of marginal cost to determine how much to supply

3. What decisions must firms make in the short-run; what criteria do they use for short-run

decisions?

4. What decisions must firms make in the long-run and what criteria do they use to for long-

run decisions?

5. What conditions comprise the pure competition model?

6. How do firms in competitive markets make short-run and long-run decisions?

7. How do short-run and long-run equilibrium differ in competitive markets?

8. In what ways do competitive markets foster allocative and technical efficiency?

III. Assess: Suggestions for determining what and how much students have learned.

Past Objective AP* Test: Based upon released objective examinations, the students have been

required to demonstrate the following content related to this unit of instruction.

Tasks related to the characteristics of a perfectly competitive firm and industry

understand characteristics of a perfectly competitive industry and firm

understand nature of price- taking in competitive firm

Tasks related to determination of short-run equilibrium in perfectly competitive firm

determine short-run equilibrium, given graph of MC and MR,

given MR , determine production of a perfectly competitive firm

Part 3/Unit IV 361

recommend a course of action for a profit-maximizing competitive firm operating at a

point where p > MC and AVC.

calculate relative profitability of a competitive firm when product price and resource,

given costs

understand MR=MC rule for maximization of profits

Tasks related to graphical analyses perfectly competitive firm

read a competitive firm graph

determine profits/losses of competitive firm, given a graph

determine short-run output in a perfectly competitive firm, given a graph

Tasks related to determination of long-run equilibrium in perfectly competitive firm

given long-run equilibrium for a perfectly competitive firm, determine what will happen to

price; determine industry output, with a given change in demand.

Past Free Response AP* Questions: Based upon released free response questions, the students

have been required to demonstrate the following content related to this unit of instruction.

1989, analyze a perfectly competitive firm with a price ceiling imposed

1990, analyze a perfectly competitive firm which experiences a change in the demand for

its product

362 Part 3/Unit IV

1991, analyze the impact (on price and output) on a perfectly competitive firm when varia-

ble costs increase

1992, a competitive firm which experiences an increase in wholesale prices (variable cost)

and one with an imposition of a price ceiling

2002, using side-by-side graphs of industry and firm, show long-run equilibrium of in-

dustry after conversion from monopoly to competitive industry

2003, using side by side graphs of industry and firm with short-run excessive (positive

economic) profits, show price and output; shade economic profits; show long-run industry

firm adjustments

2004, evaluate the perfectly competitive socially optimum output and price given a mo-

nopoly graph; calculate the tax/subsidy amount to correct for a socially optimum output.

2005, analyze a perfectly competitive industry and market in long-run equilibrium, use

side-by-side graphs of firm and industry, with a decrease in consumer income; analyze the

short-run and long-run consequences of price and output for the firm and industry

Recommended sequence of instruction: Teach perfect competition in this sequence

I. Plan Monopoly (High Barriers to entry) & Monopolistic Competition (Low Barriers to entry)

Key instructional objectives: Students do the following

Part 3/Unit IV 363

Objectives related to imperfect competition (contestable markets, monopolistic-competi-

tion)

2. determine and explain the short-run output and price for the imperfect competitor.

Computational & graphing skills: Students must complete these tasks

2. Graph and explain how monopolistic competition determines price and output

3. Within a monopolistic competition firm, do the following

a. Graph and explain effects on output, price and profits with an increase (decrease) in

per unit taxes or subsidies.

b. Graph and explain the impact on output and price with an increase (decrease) in de-

mand

Formative Signals: The following content and skill areas have been identified as areas of

weakness for students based upon past objective and free response examinations.

Objective Formative Signals: Based upon

the released objective AP* Micro Economics

rium output and price in a monopolistic

Free response Formative Signals: Past stu-

dents have found these to be problematic areas

364 Part 3/Unit IV

II. Teach Imperfect Competition Model

Chapter 23 (10)

Price Searcher Markets with Low Entry Barriers

1. COMPETITIVE PRICE SEARCHER MARKETS, P. 459 (P. 191)

2. DYNAMIC COMPETITION, INNOVATION, AND BUSINESS FAILURES, P. 469 (P. 201)

3. CONTESTABLE MARKETS AND THE COMPETITIVE PROCESS, P. 462 (P. 194)

Describe and identify monopolistic competition.

Definition/features of

Product differentiation

Explain how a firm in monopolistic competition determines its output and price in the short-run and

the long-run

Demand and marginal revenue curves

Output and price rule

Long-run equilibrium

Efficiency

4. ENTREPRENEURSHIP AND ECONOMIC PROGRESS, P. 467 (P. 199)

5. EVALUATING COMPETITIVE PRICE SEARCHER MARKETS, P. 463 (P. 195)

6. A SPECIAL CASE: PRICE DISCRIMINATION, P. 465 (P. 197)

1. What does the model of monopolistic competition have in common with the models of pure

competition and pure monopoly?

2. How does monopolistic competition affect efficiency?

III. Assess: Suggestions for determining what and how much students have learned.

Past Objective AP* Test: Based upon released objective examinations, the students have been

required to demonstrate the following content related to this unit of instruction.

Tasks related to the characteristics of an imperfect competitor model (monopolistic

competition)

Part 3/Unit IV 365

analyze long-run equilibrium conditions for a monopolistically competitive firm

explain why imperfect competitive models are inefficient (cost)

identify efficiency of a monopolistically competitive firm

Past Free Response AP* Questions: Based upon released free response questions, the students

have been required to demonstrate the following content related to this unit of instruction.

2002B compares and contrast competitive firm with monopolistic competitive firm and indus-

try; show and explains output changes; price changes and long run profits

2004 Analysis of output and pricing in monopolistic competitive firm in long run equilibrium;

Analyzes effects of entry and fixed cost increase.

Key instructional objectives: Students do the following

Objectives related to monopoly (Price Searchers With High Entry Barriers)

2. identify and graphically construct the demand, average revenue, and marginal revenue

curves for a pure monopoly.

4. identify and explain the welfare loss associated with pure monopolies.

6. evaluate price discrimination, indicating harmful and beneficial effects.

Objectives related to oligopoly (Price Searchers With High Entry Barriers)

1. define and list the characteristics of an oligopoly industry

3. use profit-payoff matrix (game theory) to explain mutual interdependence of two rival firms

4. identify and define the elements of game theory (players, strategies, dominant strategy, pris-

oner’s dilemma, Nash equilibrium)

5. identify models of oligopoly price-output assumptions and behavior including

6. explain the role of non-price competition

7. evaluate the economic efficiency and social desirability of oligopolies

Computational & graphing skills: Students must complete these tasks

1. Graph a profit maximizing output and price for a monopolist

3. Show how demand, total revenue and marginal revenue are related for a typical monopolist.

5. Graph the effects of government regulation on price and output using average cost pricing and

marginal cost pricing.

7. Create game theory (pay-off) matrixes to explain oligopoly behavior (dominant strategy, Nash

Equilibrium)

Formative Signals: The following content and skill areas have been identified as areas of weak-

ness for students based upon past objective and free response examinations.

Objective Formative Signals: Based upon

the released objective AP* Micro Economics

examinations, less than 50% of the students

have been able to correctly answer questions

to following

Free response Formative Signals: Past stu–

dents have found these to be problematic areas

determine output level of monopoly com-

pared to competition

identify profit maximizing price and out-

put

Part 3/Unit IV 367

II. Teach Monopoly Model

Chapter 24 (11)

Price-Searcher Markets with High Barriers

1. WHY ARE ENTRY BARIERS SOMETIMES HIGH? P. 476 (P. 208)

Explain how monopoly arises; distinguish between single-price monopoly and price-

discriminating monopoly.

Features/definition

2. CHARACTERISTICS OF MONOPOLY. P. 477 (P. 209)

Explain how a single-price monopoly determines its output and price.

Short-run determination of output, price and profits

MR=MC determines output; height of demand curve determines price

Relationships

o MR and price of product

3. THE CHARACTERISTISCS OF AN OLIGOPOLY, P. 480 (P. 212)

Describe and identify oligopoly and explain how it arises.

4. PRICE AND OUTPUT UNDER OLIGOPOLY, P. 482 (P. 214)

5. MARKET POWER AND PROFIT THE EARLY BIRD CATCHES THE WORM.

(INCLUDING OLIGOPOLISTIC DECISION MAKING, GAME THEORY AND THE

PRISONER’S DILEMMA) P. 487 (P. 219)

Explore the range of possible price and quantity outcomes and describe the dilemma faced by

firms in oligopoly.

Monopoly outcomes

Duopolies

Use game theory to explain how price and quantity are determined in oligopoly.

Game theory

Nash equilibrium

Key conceptual questions: Students demonstrate their understanding of the material by answer-

ing the following key conceptual questions

1. What conditions comprise the model of pure monopoly?

2. How does a monopolist determine price and output?

3. What forces prevent a monopolist from charging any price it wants?

4. How does market power enable a monopoly to increase revenues through price discrimina-

tion?

5. In what ways do monopoly markets create allocative and technical inefficiencies?

6. How does a perfect competition model compare with that of a monopolist in output, price,

profits, and efficiency?

1. What does the model of oligopoly have in common with the models of pure competition

and pure monopoly?

2. How does oligopoly affect efficiency?

3. What is game theory and how does it predict outcomes (production, price, profits)?

7. In what ways do imperfect competition markets create allocative and technical inefficien-

cies?

8. What are means of regulating imperfect competition?

9. What are the objectives of regulation?

10. Is government regulation effective?

III. Assess: Suggestions for determining what and how much students have learned.

Past Objective AP* Test: Based upon released objective examinations, the students have been

required to demonstrate the following content related to this unit of instruction.

Tasks related to graphical analyses of a monopoly firm

interpret output and price for a monopolist, given a monopolist graph

distinguish between a monopoly and perfectly competitive graph model; interpret monop-

oly graph

identify profit-maximizing output at a price given by a novel graph of a monopoly

Tasks related to how monopolies make decisions concerning output and price

understand assumptions and operation of a profit maximizing monopolist

understand and recognize conditions of a natural monopoly

Tasks related to comparison of a monopoly firm to a perfect competition model

in terms of producing the optimum amount of goods/services. compare and contrast mo-