Chapter 12 Study Guide

Chapter 12 Study Guide - 12 Monopolistic Competition: The...

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Chapter 12 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Summary In Chapter 11, you learned about the market structure of perfect competition. Growing wheat and growing apples are examples of perfectly competitive markets. Here in Chapter 12, you will learn about the more common market structure of monopolistic competition. If you shop at supermarkets and go to movie theaters, you are dealing with firms that are in monopolistically competitive markets. Monopolistical competition is the most common market structure in the United States. This structure has three characteristics: 1. There are many buyers and sellers 2. Barriers to entry are low 3. Firms compete by selling similar but differentiated goods and services Each monopolistically competitive firm faces a downward-sloping demand curve, so marginal revenue is less than price. Firms maximize profit by producing the level of output that makes marginal revenue equal marginal cost. The firm may earn an economic profit or suffer an economic loss in the short run. Because there are low entry barriers, in the long run, economic profits will cause new firms to enter the market. A firm that earns short-run profits will earn zero economic profit in the long run as entry from new firms shifts the firm’s demand curve to the left and causes it to become more elastic. If the typical firm in a monopolistically competitive market suffers economic losses in the short run, some firms will exit the market and the demand curves for each of the firms that remain in the industry will shift to the right and become less elastic. In the long run, the firm’s demand curve will be tangent to its long-run average total cost curve, but average total cost will be not be at its minimum level. Unlike perfectly competitive firms, monopolistically competitive firms charge a price greater than marginal cost, and they do not produce at minimum average total cost. A monopolistically competitive firm has excess capacity. If the firm increases its output, it could produce at a lower average cost. But consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes. Firms can use marketing to differentiate their products. Marketing tools include brand management and advertising. There are a number of factors that a firm can control that determine the firm’s success, but market forces and luck also play an important role in the firm’s profitability.
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CHAPTER 12 | Monopolistic Competition: The Competitive Model in a More Realistic Setting 332 Learning Objectives When you finish this chapter, you should be able to: 1. Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves. A monopolistically competitive firm is able to raise its price without losing all of its customers. Some customers are willing to pay the higher price because the firm has a favorable location, can offer better service, and has a higher quality product.
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This note was uploaded on 01/28/2011 for the course ACCT 2001 taught by Professor Lowe during the Spring '08 term at LSU.

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Chapter 12 Study Guide - 12 Monopolistic Competition: The...

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