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Chapter 14

Economics 1021 Chapter 14 Notes

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Economics 1021A/B
Jeannie Gillmore

Chapter 14 Monopolistic Competition  Monopolistic competition: A market structure in which: o A large number of firms compete. This implies:  Small market share and limited power to influence the price.  Ignoring of other firms because no one firm can dictate the market conditions.  Coordination between firms is difficult, and collusion is impossible. o Each firm produces a differentiated product, one that is a close substitute, but not a perfect substitute for other firms’ products. o Firms compete on product quality, price, and marketing.  Quality: The physical attributes that make a product different (design, reliability, service).  Price: The demand curve is downward sloping, so there is trade-off between price & quantity  Marketing: Appropriate advertising and packaging for the target market group. o Firms are free to enter and exit the industry.  In the long run, firms in monopolistic competition:  Make no economic profit.  Neither enters nor leaves the industry.  When existing firms make a profit, new firms enter the industry and lower the price.  When existing firms make a loss, some firms leave the industry and increase the price. Price and Output in Monopolistic Competition  Short-Run: o A firm in monopolistic competition makes its output and price decision just as a monopoly firm would. o A firm’s goal is to maximize economic profit, so  Output: A point where Marginal cost = Marginal revenue  Price: Demand  Economic Profit / Loss: (Demand – ATC) x Output o If demand > ATC, the profit maximization point is a profit. o If demand < ATC, the profit maximization point is a loss. o If demand = ATC, the profit maximization point is 0.  Long-Run: o Demand equals ATC, and therefore there is zero economic profit. o If economic profit is not zero, firms will enter or exit until it becomes zero.  Comparison with perfect competition: o In perfect competition, demand = marginal revenue = minimum ATC o In monopolisti
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