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