Ch 12 Monopolistic Competition

Ch 12 Monopolistic Competition - D f MR MC AC AC P Q Product

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Monopolistic Competition Chapter 12 1
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Market Structure 2
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Monopolistic Competition Monopolistic Competition: a market structure in which Large number of firms compete: each with a small market share Each firm produces differentiated products: D f more elastic than market D No barriers to entry Firms compete on product quality, price, and marketing Firms are not “price-takers”, but don’t face entire 3
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Monopolistic Competition Examples 4
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Monopolistic Competition 5 Df MR MC $ Q P* MC* Since D f isn’t flat, MR< D f Max π where MR=MC Result: MR=MC but P>MC (markup=P -
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Product Differentiation Purpose: raise D f and make D f less elastic so consumers don’t see other goods as substitutes for your Methods : Quality Differentiation: higher quality results in higher demand Price: each firm sets their own price, higher prices should reflect higher quality; this may 6
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Product Differentiation-- Advertising Advertising is FC → ATC = (FC+VC)/Q As ↑FC then ↑ATC from AC to AC’
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Unformatted text preview: D f MR MC AC AC P Q Product Differentiation--Advertising Effects of advertising: higher demand, more elastic 8 Long Run q* &lt; q where AC would be minimized Firm has excess capacity firm produces a quantity thats less than q where AC is minimized AC is minimized at the 9 Df MR MC AC P Q efficient scale q* Long Run Even though excess capacity often exists, this may still be better than a monopoly Better if product variety adds enough value Note: because of no restrictions on entry to the market, it will be impossible for a firm to make an economic profit in the long run. Thus, long run profit 0. 10 Key Take Homes Monopolistic Competition: treated as monopolist over applicable demand curve Differentiate themselves via prices, quality, and marketing Because entry can occur, economic profit will go to 0 in the long run 11...
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Ch 12 Monopolistic Competition - D f MR MC AC AC P Q Product

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