chapter 13 monopolistic competition

all of the following are true regarding monopolistically competitive markets

-firms may advertise to differentiate their product -there are many firms in the market -the number of firms is likely to decline when there are economic losses -the typical firm does not earn positive economic profit in the long run

in the short run this firm

incurs an economic loss that is smaller than the amount it would lose if it shut down and paid fixed costs

the typical firm in a monopolistically competitive market

is small relative to the entire market for its general product

a monopolistically competitive firm's demand curve is

less elastic than a perfectly competitive firm's demand curve and more elastic than a monopolistic firm's demand curve for the same product

monopolistically competitive markets are comprised of

many firms selling differentiated products

the demand curves of firms in monopolistically competitive markets are relatively elastic compared to market demand due to

marginal revenue exceeding price

like a perfectly competitive firm, a monopolistically competitive firm

maximizes profit by producing the quantity where marginal revenue equals marginal cost so long as price exceeds average variable cost

Monopolistically competitive firms

may earn either profits or losses in the short run, but tend to earn zero economic profits in the long run

a monopolistically competitive firm is similar to a perfectly competitive firm in that

neither is guaranteed to earn positive economic profit in the short run

which of the following is true for both monopoly firms that do not price discriminate and monopolistically competitive firms in the long-run equilibrium?

Price greater than Marginal Cost

profit-maximizing firms in monopolistically competitive markets

sell products that are very similar to each other

monopolistic competition

-if a firm is able to set price above average total cost, economic profit will be positive -if economic profit is positive, new firms are likely to enter the market in the long run, which causes the economic profit of existing firms to decrease -in the long run, economic profit will be zero if there are no barriers to entry -the existence of positive economic profit is likely to cause firms to enter this market in the long run, resulting in decreased demand for this firm's output. this firm will lower product price in response to the change in demand, and its profit will fall as a result.

profit-maximizing/loss-minimizing output and price

-monopolistically competitive firm maximizes profit by producing the quantity of output where MR=MC -firm's demand curve is downward-sloping -straight marginal revenue curve lies below the straight demand curve -firms set the price for its product just like a monopolist, charging the highest price consumers will pay for the profit-maximizing level of output -earn economic profit because price is greater than average total cost (P>ATC)

all of the following are characteristics of a monopolistically competitive industry

-there are many firms in a monopolistically competitive industry -the firms in the industry produce goods that are close, but not perfect, substitutes -there are no significant barriers to entry into the industry DO NOT engage in the industry in interdependent decision making

all of the following are characteristics of a monopolistically competitive market

-there are many firms in a monopolistically competitive market -firms in the industry produce goods that are close, but not perfect, substitutes -each firm faces a downward-sloping demand curve and has some control over the price of its product -there are no significant barriers to entry that prevent new firms from entering the market in the long run

calculate costs, revenue, profit, deadweight loss from a graph

EX. 1 Short run Positive Economic Profit Q= AND P*= At Q*, ATC= P>ATC TOTAL REVENUE TR= P X Q TOTAL COST TC= ATC AVERAGE TOTAL COST X QUANTITY PROFIT = TR - TC

in the long run, it is true that monopolistically competitive firms produce where

P>MC and and P>minimum average cost

short-run profit possibilities for a firm in a monopolistically competitive market

Produces where MR = MC Short-run profit possibilities Positive Economic profit: P >ATC, produce where MR = MC to maximize PRICE GREATER THAN AVERAGE TOTAL COST profit Zero Economic Profit: P = ATC, produce where MR = MC to maximize profit Negative Economic Profit: P<ATC LESS THAN P < ATC but P > AVC; produce where MR = MC to minimize loss P < AVC; shut down production to minimize loss (pay TFC)

product differentiation

They can product differentiate through •Advertising or Brand recognition •Superior location or quality •Special services or warranties •Other features that distinguish the firm's product from close substitutes or competing firms •Perfectly Competitive Firm: Due to perfect substitutes, no need to advertise •Monopolistically Competitive: Due to product differentiation motive, markets engage in significant marketing and advertising

which of the following events would cause this firm's profit to increase

an increase in consumer demand

as the market in which this firm operates adjust to long-run equilibrium, it is most likely that some firms will leave this market, causing

an increase in the demand faced by a firm

firms in monopolistically competitive markets

attempt to differentiate their products are likely to engage in advertising charge price that is higher to marginal cost

A firm in a monopolistically competitive market is similar to a monopoly in that

both maximize profit by producing the quantity where marginal revenue equals marginal cost

a monopolistically competitive firm's demand curve is

downward-sloping and marginal revenue lies below demand

a market is imperfectly competitive when the

firms that make up the market have no control over the price of their products

the graph illustrates a typical firm in a market that is in long-run equilibrium since

price is equal to average total cost

a monopolistically competitive firm

produces where MR=MC to maximize profit

monopolistically competitive firms have some market power because of

product differentiation

ceteris paribus, if a firm in a monopolistically competitive industry raises the price of its product

sales may drop as consumers switch to the close that are offered by other firms in the industry

jane plans to open her own restaurant and wants to create a strong demand for her product as well as make it less price elastic. all of the following are methods of product differentiation that would help her accomplish her goals except

setting the price of her meals well below the prices charged by her rivals

if a monopolistically competitive firm is producing where marginal revenue is equal to marginal cost but price is greater than marginal cost the firm

should continue to produce at this point because it is already maximizing profit

for a monopolistically competitive firms in long-run equilibrium, economic profit is:

zero because there are no barriers to entry

for monopolistically competitive firms in long-run equilibrium, economic profit is

zero because there are no barriers to entry

characteristics and examples of monopolistic competition

•Many firms •Easy entry and exit into the market in the long run (no barriers to entry) •Differentiated Products

long-run equilibrium for a firm in a monopolistically competitive market

•There are no significant barriers to entry into the market, and positive economic profit attracts new firms to the industry in the long run •As a result, long run economic profits are driven to zero •However, since price exceeds marginal cost P> MC, Monopolistically Competitive firm produces less than the socially efficient level of output •There is a deadweight loss -long run equilibrium for monopolistic competition is similar to perfect