ECON 200 CH 12

Compare demand elasticities in competitive markets and those in monopolistic competitive markets.

Competitive markets have some substitutes; demand is more elastic than in monopolistic competition where there is some market power, more inelastic.

Why is the demand curve for a monopolistically competitive firm downward-sloping?

Due to differentiated products, they are not perfect substitutes for each other. This gives each firm some ability to set its own price.

What is the condition of profit maximizing for a monopolistically competitive firm?

In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping.

Why is monopolistic competition not efficient?

In the LR firm produces at excess capacity, less Q produced - ATC is higher compared to perfect competition excess capacity, Markup: P > MC

What happens when new firms enter a monopolistically competitive industry?

Long run profit goes to zero.

What is the definition of monopolistic competition?

Many different firms, products are differentiated, free entry and exit

Which type of markets have low barriers to entry?

Monopolistic Competition

What is the difference between a monopolistically competitive demand curve and a perfectly competitive demand curve?

Monopolistic competition demand curve is downward sloping because others are convinced products are differentiated. Perfectly competitive has a horizontal demand curve, the price it receives is the same for every unit sold.

What are the differences between monopolistic competition and perfect competition? What characteristics do they share?

Monopolistic competition: differentiated products, Low barriers to entry and exit Perfect competition: Similar products, free entry and exit Similarities : many sellers

Would short-run (negative) economic profits persist in the long run in a monopolistically competitive market?

No

Would short run economic profits persist in the long run in a monopolistically competitive market?

No, firms will enter whenever they want and steal business bc of free entry and exit.

What is markup?

P - MC = markup, Price is higher than marginal cost

Which type of markets have a markup of 0?

Perfect competition

Definition of product differentiation. Examples of product differentiation.

Process that firms use to make a product more attractive by contrasting its unique qualities with competing products. Ex: Holister vs. Urban Outfitters, Chipotle vs. Taco Bell. They do so by changing up the Style, Location or Quality of the product.

What are the two features of monopolistic competition?

Product differentiation, free entry and exit

What happens when a purely competitive industry advertises?

The company goes out of business.

Would advertising be useful for a perfectly competitive firm?

The effects of a firm advertising a product in a perfectly competitive market would be illogical. Firms advertising in this market would not be maximising profits, because they are pushing up marginal costs unnecessarily as there is no impact to the firm's demand since products are standardized.

What is the relationship between the marginal revenue curve of a monopolistically competitive firm and the demand curve of this firm?

The monopolistic competitive firm maximizes profits where marginal revenue equals marginal cost. a monopolistic competitive firm demand curve is downward slope

What are the differences between monopolistic competition and monopoly? What characteristics do they share?

There is only one single producer which decides the quantity and price of the product. While in a monopolistic competition there are a large number of independent sellers and each firm has a relatively small market share hence no individual firm has any significant power over price.

When does short-run economic profit occur?

When price is above ATC.

What are the results of monopolistic competition?

While a monopolistic competitive firm can make a profit in the short-run, the effect of its monopoly-like pricing will cause a decrease in demand in the long-run. This increases the need for firms to differentiate their products, leading to an increase in average total cost.

What is the impact of advertising on the demand of a product?

Advertising increases demand by building a desire for a product or brand in consumer's minds