MicroEcon Chapter 16

Describe the three attributes of monopolistic competition.

1. Many sellers

2. Product differentiation

3. Free entry and exit

How is monopolistic competition like monopoly?

Greater market power, downward-sloping demand curve, profit maximization of MR = MC, inefficiency through deadweight loss, lower barriers to entry

How is monopolistic competition like perfect competition?

many sellers, free entry and exit, zero long term economic profit, independent decision making, short run profits and losses

Does a monopolistic competitor produce too much or too little output compared to the most efficient level?

Too little

How might advertising reduce economic well-being?

encourages overconsumption, distorts preferences, raises prices, creates barrier to entry

How might advertising increase economic well-being?

informs consumers, promotes competition, stimulates demand

How might advertising with no apparent informational content in fact convey information to consumers?

subliminal messaging

Explain two benefits that might arise from the existence of brand names.

1. Provides information about the quality of the product

2. Gives firms an incentive to maintain high quality

monopolistic competition

a market structure in which many firms sell products that are similar but not identical

imperfect competition

industries that fall somewhere between the polar cases of perfect competition and monopoly

concentration ratio

the percentage of total output in the market supplied by the four largest firm

tangent line

A line that just barely touches a point on a curve

efficient scale

the quantity that minimizes average total cost

excess capacity

the ability to increase the quantity it produces and lower the average total cost of production

What is product variety externality?

Because consumers get some consumer surplus from the introduction of a new product, the entry of a new firm conveys a positive externality on consumers

What is the business stealing externality?

Because other firms lose customers and profits when faced with a new competitor, the entry of a new firm imposes a negative externality on existing firms

oligopoly

a market structure in which only a few sellers offer similar or identical products

What are the four types of market structure?

1. Monopoly

2. Oligopoly

3. Monopolistic Competition

4. Perfect Competition

How are prices set in monopolistic competition?

Above marginal cost

MR

Marginal Revenue

MC

Marginal Cost