Economics Chapter 12 Study Guide

Economics Chapter 12 Study Guide - Economics Chapter 12...

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Economics Chapter 12 Study Guide 1) Introduction a) Monopolistic competition is a market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical products i) Ex: video stores, restaurants, movie theatres, supermarkets, clothing stores etc. 2) Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market a) If you the price of a starbuck’s coffee raises it will loose some costumers but not all because some people might light starbuck’s coffee more than other coffees and it is convenient b) The demand curve is downward sloping c) The Demand Curve for a Monopolistically Competitive Firm i) Increase in coffee price decreases amount demanded d) Marginal Revenue for a Firm with a Downward Sloping Demand Curve i) A monopolistically competitive firm must cut the price to sell more, so its marginal revenue curve will slop downward and will be below its demand curve. ii) Average revenue is the total revenue divided by quantity. (1) **Average revenue is always equal to price iii) Marginal revenue is the amount that total revenue changes as the firm sells one more unit of a good or service. iv) When starbucks cuts the price of coffee by $0.50 one good thing happens and one bad thing happens: (1) Good thing: It sells one more coffee, we call this the output effect (2) Bad thing: Receives $0.50 less for each coffee that it could have sold at the higher price, we call this the price effect v) 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. 3) How a Monopolistically Competitive Firm maximizes Profits in the Short Run a) Firms produce to the point where marginal revenue is equal to marginal cost b) Marginal cost is the increase in total cost resulting form producing another unit of output. (U-shape graph) c) As long as the marginal costs of selling one more coffee is less than the marginal revenue, the firm should sell additional coffees. d) Eventually as starbucks sells more coffees, rising marginal cost will eventually
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This note was uploaded on 04/09/2008 for the course ECON 001 taught by Professor Caseyquinn during the Spring '08 term at Lehigh University .

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Economics Chapter 12 Study Guide - Economics Chapter 12...

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