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Monopolistic competition
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market structure in which barriers to entry are low and many firms compete by selling similar but not identical products. downward slope
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How does monopolistic competition maximize profit
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MR=MC and P is greater than MC
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In the short run
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monopolistically firms might make a profit or a loss..MR=MC
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The marginal revenue for selling extra is equal
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to the green era minus the pink area (output effect minus price effect)
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How a monopolistically competitive firms maximizes profit in the short run
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Price greater than marginal cost
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MC < MR
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making profit
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MC > MR
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Not making profit
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What happens to profits in the long run?
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Entries and exits occur
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How entry of new firms eliminates profits
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As a result of this entry of new firms, the demand curve of an established firm shifts to the left and becomes more elastic. Entry will continue until the typical firm's demand curve is tangent to its ATC curve. In the long run, the typical firm's price will equal its average total cost and the firm will break even
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Comparing Perfect Competition and Monopolistic Competition
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Unlike perfectly competitive firms, monopolistically competitive firms charge a price greater than marginal cost, and they do not produce at minimum average total cost. Because price is greater than marginal cost, allocative efficiency is not achieved; and because price is greater than minimum average total cost, productive efficiency is not achieved.
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Total revenue
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P x Q
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Average revenue
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TR/Q
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Marginal revenue
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change in total revenue/change in quantity sold
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Profit
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(P-ATC) x Q
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Marketing
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All the activities necessary for a firm to sell a product to a consumer
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Brand managment
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The actions of a firms intended to maintain the differentiation of a product over time
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Avertising
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Used to differentitate their products
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Brand name
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A successful brand name can help to maintain product differentiation and delay the ability of other firms to compete away your profits
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How consumers benefit from monopolistic competition
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Many consumers are willing to accept higher price for a differentiated product so monopolistic competition is not necessarily bad for consumers
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In the long run
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firms must break even, continue to fall to the zero economic profit level
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In the long run
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price is less than marginal revenue
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How does firms charge price
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greater than MC
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In the short run
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...
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