Chapter+17+(JEM)+-+Monopolistic+Competition

Monopolistic competition is a combination of monopoly and perfect competition. There are many sellers, and all of them are monopolists. For example, the firms would be a telephone company, drug store, publishing company, etc. Basically, the products are differentiated. Also, there is no barriers to entry, just like perfect competition.

The monopolistically competitive firms in the short run show the same characteristic as monopolistic firms - downward-sloping demand curve. And in the long run, monopolistically competitive firms are in long-run equilibrium that is similar to perfectly competitive firm - P=ATC; however, the price still exceeds marginal cost, so there is a deadweight loss.



Because the all products are differentiated for different companies and charge prices above marginal cost, the companies have incentives to draw more customers, so they advertise.
 * Advertising**

There are controversial ideas about advertising. Some critics say that advertisements does not tell the quality or the price of the product, but what people might be able to benefit from, and create desires that might not even exist. In contrast, others states that advertising provides information to the people such as price, new products, and location of where they sell the products. Also, advertising would create more competition due to price differences - people would choose to buy products with lower price.

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Questions: 1. How is monopolistic competition similar and different from perfect competition and monopoly? 2. Give examples of monopolistic competition. 3. Why is advertising important for monopolistically competitive firms?

Answers: 1. Monopolistc competition has a downward-sloping demand curve; in long-run, it is in an equilibrium where P=ATC. Unlike monopoly, there are many sellers, but unlike perfect competition, all the products are differentiated. 2. books, games, CDs, movies, etc. 3. There are still substitutes to the products. Therefore, there still is a competition in monopolistically competitive firms. By advertising, firms will be able to attract more consumers to buy their products.