Microeconomics chapter 13

Brand Management:

The actions of a firm intended to maintain the differentiation of a product over time

Consumers face a trade-off when buying the product of a monopolistically competitive firm:

They are paying a price that is greater than marginal cost, and the product is not being produced at minimum average cost, but they benefit from being able to purchase a product that is differentiated and more closely suited to their tastes

For many firms, the marginal cost curve has a

U Shape

Value can take the form of product differentiation that makes the good or service more suited to consumers' preferences, or it can take the form of

a lower price

Remember that a firm makes an economic profit when its total revenue is greater than

all of its costs, including the opportunity cost of the funds invested in the firm by its owners

Firms can differentiate their products through marketing which refers to

all the activities necessary for a firm to sell a product to a consumer.

Certain factors will affect

all the firms i the market

When a firm cuts price one good thing happens and one bad thing happens

Good thing: it sells 1 more unit; this is called the output effect The bad thing: it receives less for each unit that it could have sold at a higher price; this is called the price effect

Profit =

(P-ATC) X Q

Monopolistic Competition

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products

In the short run, the firm will make a profit if P is greater than

ATC r a loss if P is less than ATC

Marketing:

All the activities necessary for a firm to sell a product to a consumer

A firm in a perfectly competitive market faces a perfectly elastic demand curve that is

also its marginal revenue curve

The success of product differentiation strategies indicates that some consumers find these products preferable to the

alternatives

For a firm in a perfectly competitive market, the demand curve and the marginal revenue curve

are the same

If a monopolistically competitive firm selling a differentiated product is earning an economic profit, the profit will

attract the entry of additional firms, and the entry of those firms will eventually eliminate the firm's profit.

In the long run, at the point where the demand curve is tangent to the average total cost curve, price is equal to the

average total cost the firm is breaking even and it no longer earns an economic profit.

One threat to a trademarked name is the possibility that it will

become so widely used for a type of product that it will no longer be associated with the product of a specific company

Firms use two marketing tools to differentiate their products:

brand management and advertising

In the long run, entry or exit of firms will eliminate profit or less and the firm will just

break even

To stay one step ahead of its competitors, a firm has to offer consumers goods or services that they perceive to have greater value than those that

competing firms offer.

Firms differentiate their products to appeal to

consumers

The success of the firm inspires competitors to

copy the new or improved product, and in the long run, the firm's economic profit will be competed away.

Advertising also increases a firm's

costs

The key difference between the monopolistically competitive firm and the perfectly competitive firm is that the

demand curve for the monopolistically competitive firm is that the demand curve for the monopolistically competitive firm slopes downward, while the demand curve for the perfectly competitive firm is a horizontal line

Marketing includes

determining which product to sell, designing the product, advertising the product, and deciding how to distribute the product and monitoring how changes in consumer tastes are affecting the market for the product.

The most important of these is the firm's ability to

differentiate its product or to produce it at a owe average cost than competing firms

Consumers are better off than they would have been had these companies not

differentiated their products

This result holds only if the firm stands still and fails to find new ways of

differentiating its product or fails to find new ways of lowering the cost of producing the product.

Once a firm has succeeded in differentiating its product, it must try to maintain

differentiation over time through brand management.

Legally enforcing trademarks can be

difficult

The demand curve for a monopolistically competitive firm will be

downward sloping

If a firm introduces new technology that allows it to sell a good or service at a lower cost, competing firms will eventually

duplicate that technology and eliminate the firm's profit.

A firm's owners and managers control some of the factors that make a firm successful and allow it to

earn an economic profit

We expect that, in the long run, firms will exit an industry if they are suffering an

economic loss

As we have seen, whenever a firm successfully introduces a new product of a significantly different version of an old product, it earns an

economic profit in the short run

In the long run, monopolistic competitive firms will experience neither an

economic profit nor an economic loss

In the short run, at least one factor of production is fixed and there is not enough time for new firms to

enter the market

If the firm is successful, it will sell more of the product at

every price and it will be able to increase the price it charges without losing as many customers.

We have seen that monopolistic competition and perfect competition share the characteristic that in long-run equilibrium,

firms earn zero economic profit

trademark

grants legal protection against other firms using its product's name

A perfectly competitive firm faces a

horizontal demand curve and does not have to cut the price to sell a large quantity.

A monopolistically competitive firm has excess capacity:

if it increased its output, it could produce at a lower average total cost

A firm's marginal cost is the

increase in total cost resulting from producing one more unit of output

U.S. firms often find it difficult to enforce their trademarks in the courts of some foreign countries, although recent international agreements have

increased the legal protections for trademarks

As new businesses open near a local business, the firm's demand curve will shift to the

left

Courts in the united states have ruled that when this happens, a firm is no longer entitled to

legal protection of the brand name

If a firm faces less competition it is likely to have a

less elastic demand curve in the short run and to have a more elastic demand curve in the long run when it faces more competition as new firms enter the industry

For each additional unit a firm sells, marginal revenue will be

less than the price

An innovative advertising campaign can

make even long-established and familiar products seem more desirable than competing products

The firm maximizes profit by producing the quantity where price equals

marginal cost

Every firm that has the ability to affect the price of the good or service it sells will have a

marginal revenue curve that is below its demand curve

Consumers will buy a product if they believe it

meets a need not met by competing products or if its price is below that of competitors

In a perfectly competitive market, both productive efficiency and allocative efficiency are achieved but in a monopolistically competitive market,

neither is achieved

Economic profit gives other entrepreneurs an incentive to enter this market and establish

new firms

Some factors that affect a firm's profitability are

not directly under the firm's control

Firms use brand management to

postpone the time when they will no longer be able to earn an economic profit.

Average revenue is always equal to the

price

Because total revenue equals price multiplied by quantity, dividing by quantity leaves just

price

For a perfectly competitive firm, the additional revenue received from selling 1 more unit is just equal to the

price

This process will continue until the representative firm in the industry is able to

price equal to this average total cost and break even

To fulfill the MR = MC condition for profit maximization, a perfectly competitive firm will

produce where P=MC

Unexpected changes in government policy can also affect a firm's

profitability

The demand curve will also become more elastic because consumers have additional coffee houses from which to buy cappuccinos, so the firm will lose more sales if it

raises prices

In the long run, the demand curve is also more elastic because the more coffeehouses there are in the area, the more sales this firm will lose to other firms if it

raises the price

Firms try to continue earning a profit by

reducing costs by improving their products by providing exceptional customer service, or by convincing consumers that their products are indeed different from what competitors offer

productive efficiency

refers to the situation in which a good is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of the average total cost curve

allocative efficiency

refers to the situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it . For allocative efficiency to hold, firms must charge a price equal to marginal cost

If firms exit, the demand curve for the output of a remaining firm will shift to the

right

Only firms in perfectly competitive markets, which can sell as many units as they want at the market price, have marginal revenue curves that are the

same as their demand curves

The key to an economic profit is either to

sell a differential product or to find a way of producing an existing product at a lower cost.

The demand curve will shift because the firm will

sell fewer units at each price when there are additional firms in the area.

A monopolistically competitive firm must cut the price to

sell more, so its marginal revenue curve will slope downward and will be below its demand curve

When a firm advertises a product, it is trying to

shift the demand curve to the right and make it more inelastic.

It is possible that a monopolistically competitive firm will suffer an economic loss in the

short run

Economists have debated whether monopolistically competitive markets being neither productively efficient not allocatively efficient results in a

significant loss of well-being to society in these markets compared with perfectly competitive markets

Firms that sell their products through franchises rather than through company owned stores encounter the problem that if a franchisee does not run his or her business well,

the firm's brand may be damaged. Firms can take steps to keep such damage from happening

We know that P>MR for a monopolistically competitive firm because

the firm's marginal revenue curve is below its demand curve

If the increase in revenue that results form the advertising is greater than the increase in costs

the firm's profits will increase

The demand curve for the monopolistically competitive firm slopes downward because

the good or service the firm is selling is differentiating from those being sold by competing firms. The perfectly competitive firm is selling a good or service identical to those being sold by its competitors

As a consequence, the owners of the firm will not be covering the opportunity cost of

their investment

For monopolistically competitive firms to earn an economic profit and defend the profit from competitors

they must differentiate their products

All firms use the same approach to maximize profit

they produce the quantity where marginal revenue is equal to marginal cost

Average revenue is equal to

total revenue divided by quantity

To defend a brand name, a firm can apply to the federal government for a

trademark

Estimates are that each year, U.S. firms lose hundreds of billions of dollars in sales worldwide as a result of

unauthorised use of their trademarked brand names.

A firm that successfully does one or both of these things creates

value for its customers

There are two differences between long run equilibrium in perfect competition and monopolistic competition

Monopolistically competitive firms charge a price greater than marginal cost Monopolistically competitive firms do not produce a minimum average total cost

A monopolistically competitive firm will maximize profit by producing where

P > MC

Unlike a perfectly competitive firm, which produces where P=MC, a monopolistically competitive firm produces where

P>MC

ifference between productive efficiency and allocative efficiency

Productive efficiency: refers to the situation in which a good is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of the average total cost curve Allocative efficiency: refers to the situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it . For allocative efficiency to hold, firms must charge a price equal to marginal cost