Chapter 16 vocabulary

Chapter 16 vocabulary - o monopolistic competition A market...

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o monopolistic competition A market structure in which many firms sell products that are similar but not identical. o oligopoly A market structure in which only a few sellers offer similar or identical products. Chapter Recap: Summary o A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry. o The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways. First, each firm in a monopolistically competitive market has excess capacity. That is, it operates on the downward-sloping portion of the average-total cost curve. Second, each firm charges a price above marginal cost. o Monopolistic competition does not have all the desirable properties of perfect competition. There is the standard deadweight loss of monopoly caused by the markup of price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policymakers to correct these inefficiencies is limited. o The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to manipulate consumers' tastes and to reduce competition. Defenders of advertising and brand names argue that firms use them to inform consumers and to compete more vigorously on price and product quality. Chapter Recap: Questions for Review 1. Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition? 2. Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market. Now show what happens to this firm as new firms enter the industry. 3. Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost? 4.
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Chapter 16 vocabulary - o monopolistic competition A market...

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