Econ Chapter 14

What are three different ways products can differentiate?

1. Physical Differences 2. Prestige 3. Location 4. Service

What are the three basic characteristics of monopolistic competition?

1. Product Differentiation 2. Many sellers 3. Free Entry

Monopolistic Competition

A market structure with many firms selling differentiated products

Why do firms advertise?

By advertising, firms hope to increase the demand and create a less elastic demand curve for their products, thus, enhancing revenues and profits. It is how monopolistically competitive firms can differentiate their products to appeal to customers. (Advertising is a way for a firm to show customers why their product is different [better] than other products)

What is the failure to reach productive efficiency?

In monopolistic competition, the tendency is for an industry to have too many firms, each producing a volume of output less than what would allow the lowest cost.

When many firms compete for the same customers, any particular firm has _______ control or interest in what other firms do.

Little;

Excess Capacity

Occurs when the firm produces below the level where average total cost is minimized.

In monopolistic competition, in the long-run equilibrium, when firms exit the industry, the demand curve for each of the existing firms will ____. With exiting, not only will the firm's demand curve move __________ but it also becomes relatively more _________ due to each firm having __________ ____________. This decline in demand continues until the _______ __________ _______ curve becomes tangent (touches the) with the demand curve and all losses finally disappear

rise; outward; less substitutes; average total cost curve

True or false: a monopolistic competitive firm is minimizing its economic losses when equilibrium price is below the average total cost at the equilibrium output?

True

True or false: because the price is greater than marginal cost, society is willing to pay more for the product price than it costs society to produce it meaning allocative efficiency when (P=MC) is unattainable

True

True or false: expensive advertising may signal quality to customers

True

True or False: entry into and exit out of the industry is unrestricted for monopolistic competition

True; and as a result, the industry has many independent sellers

True or false: monopolistic competition is closer to competition than monopoly

True; entry into and exit out of the industry is unrestricted, and consequently, the industry has many independent sellers.

True or false: within monopolistic competition, a firm produces a product that is different rather than identical

True; this then leads to a degree of monopoly power

Firms within a monopolistic competition, face a ______________ demand curve.

downward

In monopolistic competition, firms face ________sloping demand curves, firms have marginal revenue curves that are _______ the demand curve, and the price on all units sold must ______ if the firm increases production

downward; below; fall

Product Differentiation

goods or services that are slightly different, or perceived to be different, from one another

Advertising is intended to _________ a firm's demand curve and make it ______ elastic.

increase; less

In the long run, firms in monopolistic competition do not attain productive efficiency because they produce at a point to the _____ of the low point of their long-run _________ __________ _________ curve.

left; average total cost

demonstration effect (deals with advertising)

people have new urges to buy products previously unknown to them and perhaps creating a desire that may not have existed

True or false: compared to perfect competition, firms in monopolistic competition in the long run produce less output at a lower cost.

FALSE; firms in monopolistic competition in the long run produce less output at a HIGHER cost

In monopolistic competition, in the long-run equilibrium, when firms enter the industry, the demand curve for each of the existing firms will ____. With entry, not only will the firm's demand curve move __________ but it also becomes relatively more _________ due to each firm having __________ ____________. This decline in demand continues until the _______ __________ _______ curve becomes tangent (touches the) with the demand curve, and economic profits are reduced to zero

Fall; inward; elastic; more substitutes; average total cost curve

True or false: The process of entry and exit will continue until all firms in the industry are making a positive economic profit.

False; The process of entry and exit will continue until all firms in the industry are making zero economic profits.

True or false: firms that sell homogenous goods advertise frequently?

False; why spend money on advertising when a firm sells a homogeneous product and can sell all it wants at the market price.