Microeconomics - Chapter 15

Monopolistic Competition & Product Differentiation

what is monopolistic competition

a market structure with many competing producers in an industry, each producer sells a differentiated product, and there is free entry and exit from the industry in the LONG RUN

example of monopolistic competitors

restaurants

what are 3 important forms of product differentiation

differentiation by style/type, location, or quality

example of differentiation by style or type

sedans v SUVS

example of differentiation by location

dry cleaner near home v cheaper dry cleaner far away

example of differentiation by quality

ordinary chocolate v gourmet chocolate

what are 2 important features of industries with differentiated products

competition among sellers & value in diversity

explain competition among sellers

sellers are competing for a limited market, If more businesses enter the market, each will find that it sells less quantity at any given price

explain value in diversity

consumers gain from the increased diversity of products

what would happen if a firm places a price for a product above the marginal cost

buyers will spend on another product and profit will be wasted

why is having a lot of competitors a burden

Having too many nearly-identical products wastes resources.

advantage of the diversity of products is

beneficial to consumers

what’s the consequence of more producers in a market

higher average total costs

is the duplication of effort and excess capacity really an issue

no, not in practice

Which product is most likely to be produced in a monopolistically competitive market?

Which characteristic is NOT shared by both perfect
competition and monopolistic competition?

What causes monopolistically competitive firms to earn zero
profit in the long run?

what is the purpose of advertising

to convince people to buy more of a seller’s product at the going price

does a perfectly competitive firm have incentive to advertise

no, it can sell as miuch as it likes at the going price

can a monopolistically competitive firm that charges a price above the marginal cost gain from advertising

yes. because people will likely leave their product alone if their product is expensive, you need to convince buyers your product is different

recreate a profitable firm and an unprofitable firm in the short run

recreate the effects of entry in the long run

recreate the effects of exit in the long run

recreate long run zero profit equilibrium

recreate the MComp v PComp graphs