Chapter 12: Monopolistic Competition and Advertising

excess capacity

Firms are relatively small, so they are not at the output level where ATC is minimized

markup

the different between P and MC. they are possible when a firm has market power and sells a differentiated product. results in consumers paying more

product differentiation

the process that firms use to make a product more attractive to potential customers by contrasting its unique qualities with competing products

sources of inefficiency in monopolistic competition

ATC is higher compared to perfect competition, firm could lower the price it charges and sell more. markup, if the firm tried to set P=MC, the level of output sold would occur where ATC>P and the firm would lose profits

advertising

a method of non-price competition. represents 2% of US annual economic output. it provides info for consumers. further differentiate products. increase demand for the product

monopolistic competition

a market structure characterized by free entry/exit, many different firms, and product differentiation

monopolistic competitive firm

sells a differentiated product, has market power, uses profit-maximizing rule of MC=MR, charges a price on the demand curve corresponding to this point and P>MC, long run profits will depend on firm entry and exit. generally there is free entry and exit