Firm behavior and market structure

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This course is a part of AP®︎ Microeconomics, a 11-course Topic series from Khan Academy.

This unit covers the behavior of firms in different types of market structures. This unit begins with the definition of profits, making the distinction between accounting and economic profits, and establishing the profit-maximizing rule, using marginal analysis. In covering perfect competition, the unit focuses on determining short-run and long-run equilibrium, both for the profit-maximizing individual firm and for the industry, and on the equilibrium relationships among price, marginal and average revenues, marginal and average costs, and profits. We also explore the adjustment process to long-run equilibrium.

This course contains 6 segments:

Economic profit and opportunity cost

Economic profit and accounting profit are two different things (the difference being that economic profit takes into account opportunity cost). Confused? This tutorial lays it all out with the example of a restaurant.

Perfect competition

This tutorial looks at markets that are deemed to have "perfect competition." This means that there are many players with identical products, no barriers to entry, no advantage for existing players and good pricing information. Few to no real market completely matches this theoretical ideal, but many are close. Even the example we use in this tutorial (the airline industry) isn't quite perfect (you should think about why).

Monopoly

No, we aren't talking about the board game although the game does try to approximate what this tutorial is about--notice that you can charge more rent at either Boardwalk or Park Place if you own both (you have a "monopoly" in the navy blue market). The opposite of perfect competition is when you have only one firm operating. This tutorial explores what this firm would do to maximize economic profit.

Between perfect competition and monopoly

Most markets sit somewhere in-between perfect competition and monopolies. This tutorial explores some of those scenarios--from monopolistic competition to oligopolies and duopolies.

Nash equilibrium

If you haven't watched the movie "A Beautiful Mind", you should. It is about John Nash (played by Russell Crowe) who won the Nobel Prize in economics for his foundational contributions to game theory. This is what this tutorial is about. Nash put some structure around how players in a "game" can optimize their outcomes (if the movie is to be fully believed, this insight struck him when he realized that if all his friends hit on the most pretty girl, he should hit on the second-most pretty one). In this tutorial, we use the classic "prisoner's dilemma" to highlight this concept.

Why parties in a cartel will cheat

You know what Nash equilibrium is (from the other tutorial). Now we apply it to a scenario that is fairly realistic--parties to a cartel cheating. A cartel is a group of actors that agree (sometimes illegally) to coordinate their production/pricing to maximize their collective economic profit. What we will see, however, is that this is not a "Pareto optimal" state and they will soon start producing more than agreed on.