ECON112-4-08-MonopolisticCompetition - -price equals...

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Sheet1 Page 1 ECON112,4/--/08 MONOPOLISTIC COMPETITION characteristics: -large # of buyers/sellers -products are differentiated by quality, advertising, and psychology appeal -firms have limited control over prices -easy entry into the market -abundance of advertising Equilibrium: short-run: the firm has control over prices, leading to downward sloping demand curve e.g. prices go up but some consumers still remain loyal, unlike perfect competition Price of Marginal Cost < Price of Average Cost long-run: economic profits exist, but entry is easy reduction in sales for existing firms, shifting demand to the left eventually no economic profits exist and firms stop entering market Implications of long-run equilibrium results for monopolistic competition:
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Unformatted text preview: -price equals average cost/no economic profit-price does not equal minimum average cost/no efficiency in production-price is great than marginal cost, no efficiency in resource allocation underallocation of resources- resources are used for advertising, which represents a waste from society's perspective of use of resources Positive attributes of monopolistic competition:-free entry leads to adaptability-product differentiation contributes to variety and choice to consumers-product differentiation leads to quality improvement Sheet1 Page 2 other firms will enter market, causing a...
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ECON112-4-08-MonopolisticCompetition - -price equals...

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