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Theory of Monopolistic competition has 3 assumptions:
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- There are many sellers and buyers.
- Each firm in the industry produces and sells a slightly differentiated product.
- Entry and exit are easy
- Each firm in the industry produces and sells a slightly differentiated product.
- Entry and exit are easy
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Monopolistic competitor is a price
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price searcher
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Monopolistic competitor, P _______ MR
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P > MR
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Monopolistic competitor, marginal revenue curve lies
_____________ the demand curve
_____________ the demand curve
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below
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Monopolistic competitor produces the quantity of output at which MR _______MC. It charges the ______________ price per unit for this output.
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1. =
2. highest
2. highest
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Unlike the perfectly competitive firm, the monopolistic competitor does not exhibit
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resource allocative efficiency
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resource allocative efficiency
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producing a good - any good - until price equals MC ensures that all hits of the good are produced that are of greater value to buyers than the alternative goods that might have been produced. In other words, a firm that produces the quantity of output at which price equals MC (P = MC)
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The __________________ _________________ firm does not earn profits in the long run (because of easy entry into the industry), unless it can successfully differentiate its product (e.g. by brand name) in the minds of buyers.
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monopolistic competitive firms
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These structures have MANY sellers
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perfect competition and monopolistic competition
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A monopoly has how many sellers
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one
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An oligopoly has how many sellers
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few
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What type of product does a perfect competition have?
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homogeneous
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What type of product does a monopoly have?
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unique
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What type of product does a monopolistic competition have?
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slightly differentiated
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What type of product does a oligopoly have?
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homogeneous or differentiated
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Long-Run Market Tendency of Price and ATC -
For perfect competition and monopolistic competition
For perfect competition and monopolistic competition
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P = ATC (zero economic profits)
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P = ATC (zero economic profits) for which market structure (s)?
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perfect competition and monopolistic competition
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Long-Run Market Tendency of Price and ATC -
For monopoly and oligopoly
For monopoly and oligopoly
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P > ATC (positive economic profits)
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P > ATC ( positive economic profits) for which market structure (s) ?
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monopoly and oligopoly
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zero economic profits =
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the level of profit necessary to keep resources employed in a firm; normal profit. A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit)
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positive economic profits =
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...
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It is possible to turn positive profits into zero profits through...
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1. Capitalization of profits
OR
2. rent seeking activities
OR
2. rent seeking activities
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what is capitalization of profits
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...
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what are rent seeking activities and what does it affect
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...
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it is possible for positive profits to turn into zero profits if the market is
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contestable market
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contestable market
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a market in which entry is easy and exit is costless, new firms can produce the product at the same cost as current firms, and exiting firms can easily dispoe of their fixed assets by selling them
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zero accounting profit
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implies that some part of total cost has NOT been covered by total revenue
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