•The many sellers condition is met when each firm is so small relative to the total market that its pricing decisions have a negligible effect on the market price
What isproduct differentiation?
•The process of creating real or apparent differences between goods and services
What does easy entry and easyexit mean?
•There are low barriers to entry, but entry is not quite as easy as in a perfectly competitive market because monopolistically competitive firms sell differentiated products.
What is a barrier to entry inmonopolistic competition?
•Firms can differentiate themselves from their competitors in ways other than price (nonprice competition).
What is nonprice competition?
•A firm competes using reputation, location, advertising, packaging, product development, and better service rather than lower prices
Why is a monopolistic competitivefirm a price maker?
•Product differentiation gives the firm some control over its price
How does the elasticity of demand curve for a monopolisticallycompetitive firm compare to a perfectly competitive firm and a monopolist?
•It is less elastic (steeper) than for a perfectly competitive firm and more elastic (flatter) than for a monopolist
What effect does advertising haveon average costs?
•It raises the long-run average cost curve
How does a firm decide what priceto charge and how many units to produce?
MR = MC
What happens in the long run wheneconomic profits are being made in the short run?
•With easy entry, firms will enter the industry, and the demand curve for each firm shifts leftward because each firm’s market share declines.•The market price declines, and economic profits are eliminated.
What happens to a firm’s costs inthe long run?
•In addition to decreased demand from new entrants sharing the market, the cost curve for firms increases from increasing advertising and other expenses to compete against the new competition.
New firms enter--> firm demand curve decreases-->firm increases advertising expenses--> firm's LRAC curve increases leads to what...
Zero economic profit
How does monopolistic competitioncompare to perfect competition in the long run?
•Price is lower and quantity is greater in perfect competition compared to monopolistic competition
Why isprice higher and quantity lower in monopolistic competition compared to perfectcompetition?
•Because firms in monopolistic competition face a downward sloping demand curve and a MR curve beneath it which is more steeply sloped
How efficient is monopolisticcompetition?
•Less resources are used and a higher price is charged than would be the case under perfect competition
How efficient is monopolisticcompetition?
•Less resources are used and a higher price is charged than would be the case under perfect competition
What is oligopoly?
Market structure
1. Few sellers2. Homogeneous or differentiated product3. Difficult entry