Micro Econ monopolistic competition

Characteristics of Monopolistic Comp

Many sellers, free entry and exit (LR), similar yet differentiated products

Examples of Monopolistic Comp

Cereal, household cleaning products, novels

Goal of monopolistic comp

Maximize profits

Firms demand curve is

smaller and more elastic than market demand curve

(SR) profits>0 then

P> ATC

(SR) profits<0

and q*>0

(SR) profits = -FC

q*=0 (shut down)

In the long run all firms must

break even

When profit> 0 then some firms

enter, stealing customers from current firms

When profit<0 then some firms

shut down (SR) and exit (LR) and firms that stay have an increase in customers

What are the externalities

Product variety and business stealing

In a product variety externality

#of firms rise

if business stealing externality

#of firms fall

Critiques of advertising include:

Provides no info

creates inelastic demand for product

Defense for advertising

Provides info

Increases competition

Sends signal of quality