9.1 Monopolistic Competition Flashcards
characteristics of monopolistic competitive
- Many sellers and buyers;
- Products are differentiated (but close substitutes);
- Relatively free entry and exit;
- ## Information is imperfect (advertising).
why are the short run elastic
o on the number of close substitutes and how differentiated their product is.
difference for short and long run profit possibilities
short= same as perf comp (psgotve, zero, quasi, shut_
long= earn normal
what occurs when new firms enter market
o take market share off existing firms.
- // demand curve (and MR curve) shifts to the left. Process continues until normal profits earned and no new firms enter.
elasticity when firms enter
more elastic (more subs)
when firms enter= where is new profit max set up
where level of output does above where demand is tangent to ATC curve
when firms enter what is state of market
positive profit
when firms exit what is state of market
quasi loss
what happens when firms leave market
- increase their market share.
- // demand curve (and MR curve) shifts to the right. Process continues until normal profits earned and no firms leave
why (like a monopoly) can they charge higher price
firm has some market power // reduce output and higher price
define excess capacity
the difference between output at min ATC and actual profit max level of output.
why are we prepared to pay a higher price
CHOICE.
- Therefore monopolistic competition involves a trade-off between a slight loss of efficiency against greater choice.
is zero economic inevitable
only if existing firm stands still, and fails to innovate and/or continually differentiate its product;
Jhow do firms differentiation product
- brand management( loyalty )
- advertising
when is advertising successful
the increase in revenue from the increase in demand must be greater than the increase in costs from advertising.
