Class Microeconomics Notes 11/30/07
CHAPTER #11 MONOPOLISTIC COMPETITION
I.
Characteristics A. Many Firms B. Differentiated Products Not the same products, but only slight differences this means we will get monopolistic competition Because these firms produce slightly different products, they will be price makers
C. Free Entry and Exit No barriers to enter or exit Free entry and exit causes profit to approach zero In the LONG RUN, firm profits = 0 (every market structure that has free entry and exit will follow this rule)
II.
Product Differentiation Slightly altering the product If firms can, firms will attempt to alter the product to become price makers instead of price takers A. Effort to make the product slightly different from others B. Results in wider variety of goods (which benefits consumers) C. Examples Soft drinks Screen Electronics' size Automobiles Types of coffee D. How are they differentiated (Most products are differentiated) 1. Firms can differentiate products through their physical characteristics Ex: Blend of materials 2. Location a. Convenience 3. Accompanying Services a. A car warranty that is better at one dealer versus another b. Cellular Phone companies 4. Time a. Flight schedule b. Hours of operation (which hours is the firm open)
E. Differentiation Explains: a. Advertising b. Intra industry trade (could be across the nation or across the globe [international trade]) c. Consumer information services i. Consumer Report ii. CNet iii. Mobiledia iv. Phonescoop.com F. Monopolistically competitive firms have market power 1. Price makers 2. Price > M.R 3. The M.R curve lies below Demand
III.
Graphically ( See binder)