question
What are two features of monopolistic competitive firms
answer
1) Many Firms; 2) No barriers to entry (NOTE: Monopolisitic competitive firms DO NOT SELL identical products)
question
What feature of perfectly competitive firms makes them have a horizontal demand cure?
answer
They sell identical products (perfect substitutes) - Think wheat and other commoditities
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Why do perfect substitutes (in perfect competition) create a horizontal demand curve?
answer
Firms can't compete on price, so if one firm raises price people will just buy the same product from a different firm
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monopolistic competition
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A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.
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Monopolistic competitive firms should expect to make zero long-term profit (T/F)?
answer
True
question
Name some examples of firms that compete in monopolistic competitive industries
answer
Chipotle, McDonalds, Jimmy John's
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Why is the demand curve downward sloping for monopolistic competitive firms?
answer
If a firm raises price they will lose SOME BUT NOT ALL of their customers over price (price goes up, demand goes down)
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output effect
answer
lower price increases quantity sold so revenue goes up
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price effect
answer
lower price reduces revenue on all quantity sold so revenue goes down
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The output and price effects are independent of each other (T/F)
answer
False, they work against each other when a firm lowers price.
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How do the output effect and price effect impact marginal revenue?
answer
Marginal revenue changes by the output effect less the price effect.
question
Firms with downward sloping demand curves ALWAY have a marginal revenue curve that is below it (T/F)
answer
True - Demand curve is set by price so change in demand is determined by change in price (output effect). The marginal revenue curve is the output effect MINUS the price effect so MR must ALWAY be < P
question
What does it mean when MR is negative?
answer
It is the point where selling additional Q actually decreases total revenue (the Price Effect > Output Effect)
question
How do monopolistic competitive firms maximize profit in the long run?
answer
They can't, profit is always zero in the LR for monopolistic competitive firms.
question
How do monopolistic competitive firms maximize profit in the short run?
answer
Producing Q to the point that MR = MC
question
A monopolistic competitive firm should try to maximize revenue to maximize profit (T/F)?
answer
False just increasing Q will eventually lead to negative MR which will decrease TR at the same time increasing MC which will reduce profit
question
ALL firms that can adjust output maximize profit at MR = MC (T/F)?
answer
True
question
How do you show profit on Demand/Cost graph?
answer
The area between demand and ATC at all quantities below Q
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Why do we expect firms in monopolistic competitive industries to make zero profit in long run
answer
With limited barriers to entry if a firm is making a short term profit other firms will enter increasing supply thereby reducing price and eventually eliminating profit
question
Do firms in monopolistic competition have market power?
answer
Only if 1) they can operate at a lower cost than their competitors and/or 2) differentiate their product in some way (They don't have to accept zero LT profit)
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productive efficiency
answer
Producing a good or service at the lowest possible cost (Where P is tangent to ATC)
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allocative efficiency
answer
Producing a good or service up to the point where the marginal benefit to consumers is equal to the marginal cost to the firm (Where P = MC)
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Why do perfectly competitive have both productive and allocative efficiency?
answer
They operate where price = MC and average total cost is at a minimum
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Do monopolistic competitive firms have productive or allocative efficiency?
answer
No, they produce where MC = MR but MR is below the D curve so marginal benefit > MC and they do no product where ATC is at a minimum
question
Why are efficient firms good for consumers?
answer
What they are buying is 1) At the lowest possible cost (productive efficiency) and 2) the benefit isn't less than the cost (allocative efficiency)
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When is productive and allocative efficiency ok for consumers?
answer
If they are willing to pay more for a differentiated product
question
Are monopolistic firms bad for consumers?
answer
Not if consumers are satisfied with paying more for the actual OR perceived benefits.
question
Marketing
answer
all the activities necessary for a firm to sell a product to a consumer
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Brand Management
answer
the actions of a firm intended to maintain the differentiation of a product over time
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Why are marketing and brand management important to monopolistic competitive firms?
answer
They have to differentiate their product in order to not have zero long term profit.
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Advertising
answer
Messages designed to increase the demand for consumers to purchase a product or service
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inelastic demand
answer
A situation in which an increase or a decrease in price will not significantly affect demand for the product
question
Does effective differentiation of a product through advertising, marketing, and brand management effect the demand curve by making it more elastic or inelastic?
answer
Inelastic. Effective marketing, advertising, and brand management allow firms to increase price without reducing demand or not have their demand reduced by industry price reductions.
question
All the factors that impact a firms profitability are within its control (T/F)?
answer
False, profitability can be heavily impacted by factors outside of a firms control (Supply costs, economic environment, new technology, chance events, etc..)
question
What are the two primary factors that a firm controls to impact its profitability?
answer
1) Its ability to differentiate its products/services; 2) Its ability to produce at the lowest cost possible
question
What impacts a firms value to its consumers?
answer
Its ability to 1) differentiate, and 2) produce at a lower cost, when compared to its competitors
question
first-mover advantage
answer
Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage
question
Firms that move first always find long term profitability (T/F)?
answer
False, still must provide value over the long term.
question
What are examples of companies who dominated a market but were not first?
answer
Bic pens, iPod, HP printers
question
How does the book define a firm's value?
answer
The combination of differentiation and lower cost compared to competitors.
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