Chapter 12

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

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Chapter 12- Monopolistic Competition: The Competitive Model in a More Realistic Setting Monopolistic competition- A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Because changing the price affects the quantity demanded, a coffee store will face a downward sloping demand curve rather than the horizontal demand curve that a wheat farmer faces The Demand Curve for a Monopolistically Competitive Firm The increase in price decreases the quantity sold per week Marginal Revenue for a Firm with a Downward-Sloping Demand Curve A monopolistically competitive firm must cut the price to sell more, so its marginal revenue curve will slope downward and will be below its demand curve Average revenue is always equal to price When the firm cuts the price by $.50, one good thing and one bad thing will happen: good it sells one more good; we can call this the output effect bad it receives $.50 les for each quantity that it could have sold at the higher price; we can call this the price effect For each additional quantity sold, marginal revenue will be less than price Every firm that has the ability to affect the price of the good or service it sells will have a marginal revenue curve that is below its demand curve Marginal revenue is negative because the additional revenue received from selling 1 more quantity is smaller than the revenue lost from receiving a lower price on the quantity that could have been sold at the original price How a Monopolistically Competitive Firm Maximizes Profit in the Short Run All firms use the same approach to maximize profits: They produce where marginal revenue is equal to marginal cost For the local Starbucks, this means selling the quantity of coffee for which the last coffee sold adds the same amount to the firm’s revenue as to its costs
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Chapter 12 - Chapter 12- Monopolistic Competition: The...

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