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review_15 - B Price and Output Determination in...

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ECONOMICS 2302 Principles of Microeconomics Dr. Susan Williams McElroy UT-Dallas REVIEW SHEET FOR Chapter 15 Chapter 15 Monopolistic Competition Concepts, terms, and definitions to know: monopolistic competition product differentiation Most industries in the United States fall between the two extremes of perfect competition and monopoly. I. Monopolistic Competition This type of an industry is characterized by a large number of firms, no barriers to entry, and product differentiation. Firms cannot influence market price by virtue of their size. Instead, firms gain control over price by differentiating their products. A. Product Differentiation and Advertising 1. Product differentiation is a strategy that firms use to achieve market power. Differentiation is accomplished by producing products that have distinct positive identities in consumers’ minds. 2. Product differentiation, or the creation of a distinct identity for the product in consumers’ minds, is often accomplished through advertising.
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Unformatted text preview: B. Price and Output Determination in Monopolistic Competition 1. Product Differentiation and Demand Elasticity: Product differentiation makes demand less elastic. A monopolistically competitive firm faces a downward sloping demand curve. However, demand will be more elastic than the demand curve faced by a monopoly. 2. Price/Output Determination in the Short Run: The firm chooses the price/output combination that maximizes profit. This occurs where MR = MC. Price may or may not be above ATC. * The reasoning behind the derivation of the marginal revenue curve in monopolistic competition is identical to that in monopoly. º 3. Price/Output Determination in the Long Run: Firms earning profits provide an incentive for new firms to enter, which drives down demand for the existing firms. New firms enter until excess profits are eliminated; graphically this is the point at which the demand curve is tangent to the ATC curve. Firms now are just breaking even. 1...
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