Economics 1021A/B Chapter Notes - Chapter 14: Monopolistic Competition, Substitute Good, Perfect Competition

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Irene Trela

Document Summary

Each firm supplies a small part of the total market industry output. Limited power to influence the price of its product. Must be sensitive to the average market price of the product, but the firm does not pay attention to any one individual competitor. Collusion: when firms in monopolistic competition conspire to fix a higher price. Because there is a lot of firms in the market, collusion is not possible. Product differentiation: close substitutes but not perfect substitutes. Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry. Can not make economic profit in the long run. Price and output are determined by finding the point where mr=mc and following that up to the demand curve. Profit maximizing may actually be loss minimizing. Profit is the rectangle between the point on the demand curve equivalent to mr=mc and the point on the atc curve.