What are the three characteristics of a monopolistical competition?
1. many buyers and sellers
2. barriers to entry are low
3. firms compete by selling similar but differentiated goods and services
Describe the demand curve for a monopolisitcally competitive firm.
How do firms maximize profit in a monopolistic competition?
producing the level of output that makes marginal revenue equal marginal cost
What can happen to the firm in a monopolistic competition in the short run?
can earn an economic profit or suffer an economic loss
How do firms in a monopolistically competitive market handle price?
1. charge a price greater than marginal cost
2. do not produce at minimum average total cost
Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.
It is able to raise its prices without losing all of its customers. Some customers are willing to pay the higher price because the firm has a favorable location, can offer better service, and has a higher quality product
1. refers to all the activities necessary for a firm to sell a product to consumers
2. brand management
What are the key factors that determine a firm's success.
1. its ability to differentiate its product
2. its ability to produce at a lower average cost than competing firms
3. the prices of inputs it uses in production and random chance
Analyze the situation of a monopolistically competitive firm in the long run.
Since entry barriers are low in monopolistically competitive industries, short-run profits give entrepreneurs an incentive to enter the market and establish new firms. The entry of new firms will shift the demand curves of existing firms to the left and and make them more elastic. If firms suffer short-run economic losses, some firms will exit the industry in the long run. This will shift the demand curves of remaining firms to the right and make them more inelastic. In the long run, the demand curve of a typical firm will be tangent to its average total cost curve. With price equal to average total cost in the long run, the firm's profit will be zero.
Compare the efficiency of monopolistic competition and perfect competition.
In the long run, the profit-maximizing level of output for a monopolistically competitive firm occurs where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve. Unlike a perfectly competitive firm, a monopolistically competitive firm does not achieve allocative efficiency or productive efficiency.
Why do monopolistically competitive firms have only limited control over their prices?
they face competition from many firms selling similar products
When does a monopolistically competitive market maximize profits in the long run?
where price exceeds MC