CHAPTER 17 MICRO

MC.

1. Profit is maximized when MR = ___

benefit

Efficiency and Product Development Regardless of whether a product improvement is real or imagined, its value to the consumer is its marginal benefit, which equals the amount the consumer is willing to pay. The marginal-- to the producer is the marginal revenue, which in equilibrium equals marginal cost. Because price exceeds marginal cost, product improvement is not pushed to its efficient level.

excess efficient markup

Excess Capacity A firm has___ capacity if the quantity it produces is less that the quantity at which average total cost is a minimum. A firm's ___scale is the quantity of production at which average total cost is a minimum. Markup A firm's ___ is the amount by which price exceeds marginal cost.

Deadweight Loss

Is Monopolistic Competition Efficient? ___ Because price exceeds marginal cost, monopolistic competition creates deadweight loss—an indicator of inefficiency. Making the Relevant Comparison Price exceeds marginal cost because of product differentiation. But product variety is valued. The Bottom Line Product variety is both valued and costly. But compared to the alternative, monopolistic competition looks efficient.

decreases ..increases

Long Run: Zero Economic Profit Economic profit induces entry and economic loss induces exit, as in perfect competition. Entry --the demand for the product of each firm. Exit -- the demand for the product of each firm. In the long run, economic profit is competed away and firms make zero economic profit. Figure 17.3 on the next slide illustrates long-run equilibrium.

Excess

Monopolistic Competition and Perfect Competition The two key differences between monopolistic competition and perfect competition are that in monopolistic competition, there is ---capacity A markup of price over marginal cost

fixed

Selling Costs and Total Costs Advertising expenditures increase the costs of a monopolistically competitive firm above those of a perfectly competitive firm or a monopoly. Advertising costs are --costs. Advertising costs per unit decrease as production increases. Figure 17.5 on the next slide illustrates the effects of selling costs on total cost.

Herfindahl-Hirschman Index

The ____ (HHI) is the square of the percentage market share of each firm summed over the largest 50 firms in a market. For example, if four firms have market shares of 50 percent, 25 percent, 15 percent, and 10 percent, then HHI = 502 + 252 + 152 + 102 = 3,450. A market with an HHI of less than 1,000 is regarded as competitive and between 1,000 and 1,800 is moderately competitive.

four-firm concentration ratio..oligopoly...competitive

ThE___ is the percentage of the value of sales accounted for by the four largest firms in the industry. The range of concentration ratio is from almost zero for perfect competition to 100 percent for monopoly. A ratio that exceeds 60 percent is an indication of -- A ratio of less than 40 percent is an indication of a -- market—monopolistic competition.

Marketing Expenditures

__ Firms in monopolistic competition spend a large amount on advertising and packaging their products. Marketing ___ A large proportion of the prices that we pay cover the cost of selling a good. Eye On Your Life shows the selling costs that you pay when you buy a new pair of running shoes.

Quality Price Marketing

____ Design, reliability, after-sales service, and buyer's ease of access to the product. ___ Because of product differentiation, the demand curve for the firms' product is downward sloping. ___ Marketing has two main forms: Advertising and packaging.

Monopolistic competition

___is a market structure in which A large number of firms compete. Each firm produces a differentiated product. Firms compete on price, product quality, and marketing. Firms are free to enter and exit.

Product differentiation

__is making a product that is slightly different from the products of competing firms. A differentiated product has close substitutes but it does not have perfect substitutes. When the price of one firm's product rises, the quantity demanded of that firm's product decreases.