Textbook Notes (368,566)
Canada (161,966)
Economics (14)
01:220:102 (14)
Chapter 16


3 Pages
Unlock Document

Thomas Prusa

Chapter 16 – Monopolistic Competition and Product Differentiation The Meaning of Monopolistic Competition  Monopolistic competition is a market structure in which there are many competing producers in an industry, each producer sells a differentiated product, and there is free entry into and exit from the industry in the long run Large Numbers  Many producers in a monopolistically competitive industry Differentiated Products  Each producer has a product that consumers view as somewhat distinct from the products of competing firms  Consumers see these competing products as close substitutes Free Entry and Exit in the Long Run  New producers, with their own distinct product, can enter the industry freely in the long run  Firms will exit the industry if they find they are not covering their costs in the long run Product Differentiation  Producers compete for the same market, so entry by more producers reduces the quantity each existing producer sells at any given price  Consumers gain from the increased diversity of products Differentiation by Style or Type  Perfect/imperfect substitutes Differentiation by Location  Location matters to consumers; monopolistically competitive industries supply goods differentiated by location Differentiation by Quality  Depends on how much the additional quality matters to consumer and how much the consumer will miss the other things they could have purchased with that money  Because consumers vary in what they are willing to pay for higher quality, producers can differentiate their products by quality- some offering lower-quality, inexpensive products and other offering higher-quality products at higher price Understanding Monopolistic Competition Monopolistic Competition in the Short Run  Key to whether a firm with market power is profitable or unprofitable in the short run lies in the relationship between its demand curve and its average total cost curve  Like a monopolist, each firm in a monopolistically competitive industry faces a downward-sloping demand curve and marginal revenue curve  Short run- may earn a profit or incur a loss at its profit-maximizing quantity Monopolistic Competition in the Long Run  In the long run, a monopolistically competitive industry ends up in zero-profit equilibrium- each firm makes zero profit at its profit-maximizing quantity  A firm facing a downward-sloping demand curve will earn positive profits if any part of that demand curve lies above its average total cost curve  It will incur a loss if its demand curve lies everywhere below its average total cost curve  If the typical firm earns positive profit, new firms will enter the industry in the long run, shifting each existing firm’s demand curve to the left  If the typical firm incurs a loss, some existing firms will
More Less

Related notes for 01:220:102

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.