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Total Revenue = P x Q

Marginal Revenue = Change in TR/ change in Q

AR = TR/Q

Marginal Cost Change in Total Cost/ Change in Quantity

🧠 Why MR = MC Maximizes Profit

🔼 If MR > MC:

You’re making more from the next loaf than it costs to produce it.

That means you’re adding to profit.

So: Keep producing — you're not at the maximum yet.

🔽 If MR < MC:

The next loaf costs more than it brings in.

That means you’re losing profit on that unit.

So: Produce less — you’ve gone past the profit-maximizing point.

✅ When MR = MC:

The extra money made equals the extra cost.

You’re no longer adding or subtracting from profit.

This is the peak — the profit-maximizing quantity.

homogeneous, we mean that:

One unit of the product is no different from another unit.

Buyers don’t care who made it — they just want the product at the lowest price.

There's no brand loyalty or quality difference.

Heterogeneous means different or unique.

Examples:

Starbucks coffee vs. Dunkin’ vs. McDonald’s – each has a unique taste and style.

iPhones vs. Samsung phones – different features, branding, and appeal.

Cars, clothes, or even restaurants — people compare brands and qualities.

Economic profit is the difference between a firm's total revenue and its total costs, including both explicit and implicit costs.

As new firms enter a monpolistically competitive market, existing firms experience a decrease in demand and a fall in profits.

Long-run economic profit:

The key to earning economic profits is either to sell a differentiated product or to find a way of producing an existing product at a lower cost.

If a monopolistically competitive firm selling a differentiated product is earning profits, these profits will attract the entry of additional firms, and the entry of those firms will eventually eliminate the firm's profits.

If a firm introduces new technology that allows it to sell a good or service at a lower cost, competing firms will eventually be able to duplicate that technology and eliminate the firm's profits.

But this result holds only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

Firms try to avoid losing profits by reducing costs, by improving their products, or by convincing consumers their products are indeed different from what competitors offer.

When new firms enter a monopolistically competitive market, the economic profits of existing firmswill decrease because their demand curves will shift to the left.

Excess capacity: Is equal to the difference between the profit-maximizing level of output and the productively efficient level of output.

Profit maximizing level of output: The monopolistically competitive firm maximizes profit by producing where marginal cost equals marginal revenue. In this example, this occurs when the firm produces 7 thousand bottles of shampoo.

The productively efficient level of output: Occurs where production for the monopolistically competitive firm is at lowest average total cost. This occurs when 11 thousand bottles of shampoo are produced.

Excess capacity: Is equal to the difference between the profit-maximizing level of output and the productively efficient level of output.

The long-run equilibrium price: In a perfectly competitive market is that price where long-run average cost is minimized. In this example, this occurs when price equals $1.10. Consequently, the firm produces 11 thousand bottles of shampoo.

The productively efficient level of output: Where production occurs at lowest average total cost. This occurs when 11 thousand bottles of shampoo are produced.

Therefore, the firm has no excess capacity.

Monopolistic competition A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.

Perfect competition A market that has many buyers and sellers, all of whom are selling identical products, and no barriers to new firms entering the market.

There are two important differences between long-run equilibrium in the two markets:

1. Monopolistically competitive firms charge a price greater than marginal cost (while perfectly competitive firms produce where price equals marginal cost).

2. Monopolistically competitive firms do not produce at minimum average total cost (while perfectly competitive firms produce at minimum average total cost)

Monopolistic competition versus perfect competition:

The demand curve for the monopolistically competitive firm slopes downward.

The demand curve for the perfectly competitive firm is a horizontal line.

The demand curve for the monopolistically competitive firm slopes downward because the good or service the firm is selling is differentiated from the goods or services being sold by competing firms.

Firms differentiate their products to appeal to consumers.

Advertising and profit: Firms advertise to increase profits.

If the increase in revenue that results from the advertising is greater than the increase in costs, the firm's profits will rise.

When a firm advertises a product, it is trying to shift the demand curve for the product to the right and to make it more inelastic. If the firm is successful, it will sell more of the product at every price, and it will be able to increase the price it charges without losing as many customers.

Of course, advertising also increases a firm's costs. If the increase in revenue that results from the advertising is greater than the increase in costs, the firm's profits will rise. Profits will fall if the increase in cost is greater.

A trademark:

Grants legal protection against other firms using a product's name.

One threat to a trademarked name is the possibility that it will become so widely used for a type of product that it will no longer be associated with the product of a specific company.

In addition, trademarks can be difficult to enforce legally. For example, U.S. firms find it difficult to enforce their trademarks in the courts of some foreign countries.

Alternatively, if a franchise does not run his or her business well, the firm's brand may be damaged.

Brand management is designed to maintain product differentiation.

Monopolistically competitive firms will be profitable to the extent that they differentiate their product and produce at lower average cost than competitors.

What is a key factor that determines a firm's profitability?

Differentiation of a firm's product from other products.

Chance events.

A firm's average cost of production relative to that of competing firms.

Factors affecting a firm's entire market.

How does the entry of new coffeehouses affect the profits of existing coffeehouses?

Entry will decrease the profits of existing coffeehouses by shifting each of their individual demand curves to the left and making the demand curves more elastic.

Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that

Part 3

they are able to purchase a differentiated product that more closely suits their tastes.