Mirco - Monopolistic Competition

Long run

- depends on the difference in quantity produced - Monopolistically competitive firms are neither allocatively efficient nor productively efficient in the long run. - In the long run, the economic profits for a monopolistically competitive firm will be the same as the profits for a monopolist.

ATC

= AFC + AVC

Profit per unit

= Price - ATC

Which of the following characteristics differentiates a firm in an oligopolistic market from a firm in a perfectly competitive market?

A firm in an oligopolistic market has to consider its own impact on price when making production decisions.

Oligopoly

A market structure characterized by a few large producers, of either standardized or differentiated products, operating in industries with extensive entry barriers. These producers are price markets and behave strategically when making decisions related to the features, prices, and advertising of their products

monopolistic competition

A market structure characterized by a relatively large number of sellers producing a differentiated product (so firms face downward-sloping demand curve), for which they have some control over the price they charge, in a market with relatively easy market entry and exit

What is one difference between a firm in a perfectly competitive industry and a firm in a monopolistically competitive industry?

A monopolistically competitive firm does not have the exact same product as other firms.

What is one difference between a firm in a perfectly competitive industry and a firm in a monopolistically competitive industry?

A monopolistically competitive firm faces competition from firms producing close substitutes.

collusion

A situation in which individuals, firms, or group of actors coordinate their actions to achieve a desired outcome. Collusion is generally used to achieve an outcome that would not be possible in the absence of coordinated actions, it is typically associated with illegal or anticompetitive behaviors

curves

DC - downward sloping Flatter than that of monopolist MR curve - lies below the demand curve more elastic - because the availability of close substitutes

short run equilibrium

Depending on the demand for a monopolistically competitive firm's product, it may have economic profits (other firms enter, reduce market shares and prices and eliminating the economic profit), losses (firms exit, increasing market shared and prices and eliminating the losses for the remaining firms), or normal profit.

Which of the following best represents the pricing behavior of firms in an oligopolistic market?

Looking Over Your Shoulder Handbag Co. chooses the price it charges by estimating what its rivals are most likely to do and then taking their responses into consideration.

profit maximizing rule

MR = MC The monopolistically competitive firms should expand production up tpt the point where MR = MC

productive efficiency (long run)

Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a g/s

Profit FORMULA

Profit = Profit per Unit x Output

Profit FORMULA

Profit = TR - TC Profit > economic profit Profit = 0 normal profit Profit < 0 loss

Producers operating in oligopolistic markets can generate normal ______ and even _____ losses in the short run

Profits; losses

Which of the following best represents the pricing behavior of firms in a monopolistically competitive industry?

Teen Angle Hardware looks for a niche to sell its hardware products to teens but finds it difficult to earn anything more than normal profits due to other hardware stores also looking for niches.

Normal profit

The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit.

Which of the following is an example of an oligopolistic market with a differentiated product?

The market for cell phone services

product differentiation

The strategy of distinguishing one firm's product from the competing products of other firms

excess capacity

The underutilization of resource that occurs when the quantity of output a firm chooses to produce is less than the quantity that minimizes average total cost

dominant strategy

a situation in which a particular strategy yields the highest payoff regardless of the other player's strategy

mutual interdependence

a situation in which the strategy followed by one producer will likely affect the profits and behavior of another producer A manufacturer's profits are determined not only by its decisions but also by the decisions of the other firms in the industry. - this is why oligopolistic firms are ^^^

payoff matrix

a table showing the potential outcomes arising from the choices made by decision makers

The graph shows the payoff matrix for two competing firms in an oligopolistic market. The columns represent the potential strategies of Producer A and the rows represent the potential strategies of Producer B. The upper-right payoffs in each box represent the payoffs for Producer A and the lower-left payoffs represent the payoffs for Producer B. a. Does Producer A have a dominant strategy? b. Does Producer B have a dominant strategy? c. The Nash equilibrium is:

a. No b. Yes c. Producer A: Low price; Producer B: Low price.

The graph shows the payoff matrix for two competing firms in an oligopolistic market. The columns represent the potential strategies of Producer A and the rows represent the potential strategies of Producer B. The upper-right payoffs in each box represent the payoffs for Producer A and the lower-left payoffs represent the payoffs for Producer B. a. Does Producer A have a dominant strategy? b. Does Producer B have a dominant strategy? c. The Nash equilibrium is:

a. Yes b. Yes c. Producer A: Low price; Producer B: Low price.

A firm is operating in the United States with only two other competitors in the industry. a. It is likely this industry would be characterized as: b. Firms in this industry will likely earn: c. If foreign firms begin supplying the product, increasing the number of competitors, it is likely that:

a. oligopoly b. an economic profit. c. economic profits will fall.

Nash Equilibrium

an outcome in which, unless the players can collude, neither player has an incentive to change his or her strategy

Impediments that prevent firms from entering a market or an industry are known as

barrier to entry

Maximize profits in short run by

following marginal revenue and marginal rule: produce output up to the point where MR = MC Result = short run economic profits, normal, or losses ^^ determined where Q = D and the difference from that w where the ATC is

the output level for a monopolistically competitive firm is lower than the output level that achieves the minimum ATC for the firm

is not productively efficient in the long run

Because monopolistically completive firms face a downward-sloping demand curve, their ________ revenue curve lies below the _______ curve

marginal, demand

Oligopolies are considered to be:

neither allocatively nor productively efficient.

Game theory, which is the study if oligopoly behavior, originated from the study of games such as the following

poker, cheese, checkers

allocative representation (long run)

producing the g/s that are most wanted bu consumers in such a way that their marginal benefits equals their marginal cost

Economic profit

the level of profit that occurs when total revenue is greater than total cost Creates an incentive for other monopolistically completive firms to enter market

game theroy

the study of the strategic behavior of decision makers

deadweight loss

the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium The efficiency loss resulting from a monopolistically completive market