micro unit 13

profit

(P - ATC) x Q

the monopolistically competitive firm sells a ---- product and faces a ------ demand curve

- differentiated - downward-sloping

firm entry

-MR = MC determines profit max Q -price is determined using demand curve -firm makes economic profit -profit will attract new firms to enter -as firms enter they will attract consumers away -firm demand will decrease and become more elastic -so will the marginal revenue curve -firms will keep entering until profits are zero

advertising

-critical element for monopolistically competitive firms -by advertising effectively, firms can increase demand for their products -shift demand to the right -use advertising to differentiate their products -make the demand curve more inelastic essentially- combat effects from entering firms to maintain profit

Differentiating products

-maintaining profits relies on firms maintaining that their products are different and desirable -need marketing/ brand merchandising to make this happen

Demand and Marginal-Revenue Curves for a Monopoly

-marginal revenue curve will always be below demand -reducing the price in order to increase sales results in revenue decreasing (negative marginal revenue)

marginal revenue curve

-marginal revenue is less then price -marginal revenue curve will be lower than the demand curve

the success of a firm

-marketing a product can crease value for a firms costumers -profit of a firm will depend on how well a firm can differentiate its product to create this value at a lower cost than any other firm

monopolistic competition in the long run

-not allocatively efficient -ATC is not at the minimum -not productively efficient

Is monopolistic competition bad for consumers?

-not necessarily -consumers might benefit from product differentiation -many customers are willing to accept a higher price for a differentiated product

profits in the long run

-profits attract new firms, high ease of entry allows them to do this -monopolistic competitors have an advantage that perfect competitors do not... they sell a differentiates product to their competitors

brand names

-successful brand names help maintain product differentiation and delay the ability of other firms to compete away your profits -firms have to maintain the perception of their product as better others Ex: - a highly successful name name is uniquely associates to that product, and not to generic producer -other firms don't illegally use their brand name -franchises and others legally allowed to use their brand name maintain the level of quality and service you expect

preventing firms from earning zero profit in the long run

1. incubate so that their costs are lower than other firms 2. convince their costumers that their product/experience is better - actually make it better in some unique way - make costumers perceive that it is better, perhaps through advertising

profit maximization

1. use MC = MR to identify the maximizing profit quantity 2. Draw a vertical line at that quantity 3. the vertical line will cross the demand curve: thus determines the price 4. vertical line will also cross the ATC curve, this is the average cost 5. show the profit or loss with the rectangle with height (P - ATC) and length (Q - O), Where Q is the optimal quantity

Monopolstic Competition

The same thing as perfect competition except products are not identical to their competitors ex: Qdoba vs. Chipotle -firm demand curve is downward sloping for monopolistic competitors

perfect competition

a market structure in which a large number of firms all produce the same product -no barriers to entry to new firms entering the industry

marketing

all the activities necessary for a firm to sell a product to a consumer -try in increase demand for a product

which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits

both perfectly competitive and monopolistically competitive

any action the firm takes to maintain product differentiation over time is known as

brand management

what trade-offs do costumers face when buying a product from a monopolistically competitive firm

consumers pay a price greater than marginal cost but also have a wider array of choices

a consumer may pay more for an identical product from a given retailer due to

differentiation based on something other than price

computing average revenue

divide total revenue by the number of units produced

to maximize profits

firm should produce the level of profits where marginal revenue and marginal cost are equal

a monopolistically competitive firm in a long-run equilibrium produces where

its demand curve is tangent to its average total cost curve

a monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and

low barriers to entry

which if the following best describes the additional revenue associated with selling an additional unit of output?

marginal revenue

a monopolistically firm produces where

marginal revenue equals marginal cost

what is the term given to all the activities necessary for a firm to sell a product to a costumer

marketing

which type of efficiency is achieved by a monopolistically competitive firm in the long run?

neither allocative nor productive efficiency

marginal revenue

output effect minus the price effect

for what type of market structure is the demand curve the same as marginal revenue

perfect competition

If a monopolistically competitive firm's demand curve is above its average total cost curve, then the firm is making

positive economic profit

which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers

product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs

productive efficiency

refers to producing items at the lowest possible cost

allocative efficiency

refers to producing up to the point where the marginal benefit to consumers is just equal to the marginal cost to firms

a firm may opt to pay millions of dollars to celebrity endorsements in order to

signal to consumers that the advertised product is appealing and likely to be popular

brand management

the actions of a firm intended to maintain the differentiation of a product over time -try to make the product standout from the others

monopolistically competitive firms have some control over price because

the products they sell are differentiated