Ch 17 outline

Ch 17 outline - Chapter 17 outline: I. Definition of...

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Chapter 17 outline: I. Definition of  monopolistic competition : a market structure in which many firms sell  products that are similar but not identical. II. Characteristics of Monopolistic Competition A. Many Sellers B. Product Differentiation C. Free Entry III. Competition with Differentiated Products A. The Monopolistically Competitive Firm in the Short Run 1. Each firm in monopolistic competition faces a downward-sloping demand  curve because its product is different from those offered by other firms. 2. The monopolistically competitive firm follows the monopolist's rule for  maximizing profit.
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a. It chooses the output level where marginal revenue is equal to  marginal cost. b. It sets the price using the demand curve to ensure that  consumers will buy the amount produced. 3. We can determine whether or not the monopolistically competitive firm is  earning a profit or loss by comparing price and average total cost. a. If  P  >  ATC , the firm is earning a profit. b. If  P  <  ATC , the firm is earning a loss. c. If  P  =  ATC , the firm is earning zero economic profit. B. The Long-Run Equilibrium 1. When firms in monopolistic competition are making profit, new firms have  an incentive to enter the market. a. This increases the number of products from which consumers  can choose. b. Thus, the demand curve faced by each firm shifts to the left. c. As the demand falls, these firms experience declining profit.
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2. When firms in monopolistic competition are incurring losses, firms in the  market will have an incentive to exit. a. Consumers will have fewer products from which to choose.
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Ch 17 outline - Chapter 17 outline: I. Definition of...

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