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Monopolistically Competitive Market: Definition
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Combines most of the characteristics of a pure competition with some of the monopoly characteristics as well.
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Is it easy to enter the monopolistically competitive industry?
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Yes.
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What is one of the key characteristics to a monopolistically competitive firm?
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Advertising.
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Advertising: Why?
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Differentiates their product and is one way firms compete for customers.
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Product Differentiation: (3) Ways
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(1) By quality, or customer service.
(2) By price.
(3) Memorable advertising with humor, notable jingles, or recognition through branding.
(2) By price.
(3) Memorable advertising with humor, notable jingles, or recognition through branding.
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Why would a monopolistically competitive firm advertise?
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To promote societal interest.
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Is advertising beneficial to society?
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Yes, since it communicates choice or variety.
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Who has a more elastic demand curve; a Monopolistically competitive firm or a Monopoly?
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Monopolistically competitive firm.
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Why does a monopolistically competitive firm have an overall more elastic demand curve than a monopoly?
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Although the monopolistically competitive firm may have some market power through product differentiation, and have some ability to influence price, they face some amount of competition. A monopoly firm has no competition and no substitutes for its good or service.
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Monopoly: Demand Curve
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A more inelastic demand curve.
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Monopolistically Competitive Firm: Demand Curve
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Lies between perfect competitive firm's and monopoly firm's demand curves.
More elastic demand curve.
More elastic demand curve.
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What happens to the monopolistically firm's curves in the long run if it earns positive economic profit?
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The firm's demand curve decreases
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How does a firm determine the profit maximizing output?
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By setting marginal cost equal to marginal revenue.
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Profit Maximizing: Output Level Function
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(q) Comparing average total cost to price determines whether the firm earns an economic profit or incurs an economic loss.
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Economic Profit: When?
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Price (P1) > ATC (Average Total Cost)
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Economic Loss: When?
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Price (P1) < ATC (Average Total Cost)
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In the long run, perfect competitors and monopolistic competitors earn zero economic profit. How are they different?
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Monopolistically competitive firms mark up their products, perfectly competitive firms do not.
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Monopolistically Competitive: Long-Run Output
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Slightly to the left of the minimum ATC point.
Charge a mark-up price and have excess capacity.
Charge a mark-up price and have excess capacity.
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