Chapter17+JDEM



What are the characteristics of a monopolistic competition market? What is the result of differentiated products? Why is there equilibrium in the long run? What is the difference between perfect and monopolistic competition? What effect does monopolistic competition have on society? What role does advertisement play?
 * Main Question**

=Introduction= This chapter will be about a very interesting market of Monopolistic competition. This market is very interesting as the firms make very similar products and end up using very much money on advertisements. Well, the details are not so important right now. By learning the behaviors of firms of Monopolistic competition, one can understand why so many firms in this market spend so much money to make their product look very unique and special.

- a market structure that includes many sellers - products are similar, but differentiated - there is free entry into the market - this type of market is a combination between a monopoly and a competitive market - very similar to oliogopoly, but it resembles perfect competition more
 * What are the characteristics of monopolistic competition?**


 * The result of differentiated products:**

- because the products that are sold differ, the demand curve is downward sloping - the quantity where MR (marginal Revenue) equals MC (marginal cost) is the PROFIT MAXIMIZATION point - this market chooses its quantity and price just like a MONOPOLY would - differing locations of MC, MR, ATC, DEMAND decide whether there will be profit or loss in short term

- the above graph is impossible to happen in long run due to free entry - thus, monopolistically competitive market likes to have 'zero-profit' in order to stop the instability and movements of money due to free entry and exit - this certain characteristic is just like it is in perfect competition - by eliminating profit and keeping the cost low, the revenue will increase - the above diminishes incentives to join or exit the market as well as keep the firms in the market satisfied
 * Long Run Equilibrium exist because....?**

- the major difference between these two markets: EXCESS CAPACITY & MARKUP
 * Perfect vs. Monopolistic competition**

EXCESS CAPACITY - under monopolistic competition, firms produce on downward sloping portion of ATC curve whereas perfectly competitive markets produce at the minimum point of ATC - excess capacity applies to monopolistically competitive markets - increasing the quantity produces and lowers the average cost of total production - it measures the quantity difference between quantity produced to the efficient scale MARKUP OVER MARGINAL COST - for monopolistically competitive firm, price exceeds MC because the firm always has some market power to control - the concept of zero profit can be seen on the perfectly competitive graph - markup measures the difference in price between "price" and marginal cost

- the cause of inefficiency is the markup of price over MC - regulation is another factor - PRODUCT-VARIETY EXTERNALITY: through enough consumer surplus, entry of a new firm doesn't necessarily lead to loss - BUSINESS-STEALING EXTERNALITY: since firms lose customers and profits from entering markets as a new competitor, its entrance affects the rest of the market in a negative way
 * Monopolistic competition's effect on society is?**

THE CRITIQUE OF ADVERTISING - some critiques say that advertising is equal to manipulating people's tastes; that it's //more psychological than informational// - it often convince consumers that products are more different than they truly are when consumers are put into situations to choose between two equal or similar products - with less elastic demand curve, each firm changes a larger markup over MC THE DEFENSE OF ADVERTISING - advertising develops competition - the more competition there is, the more incentives are brought to make cheaper and better quality products - which results overall consumer happiness Brand Names - economists defend that brand names is a useful way for consumers to be guaranteed with high quality goods - it stirs up incentives to maintain certain quality for more persuasion for more customers to purchase -- 1. monopolistic competition has
 * The role of advertisement:**

A) No barriers to entry B) Some barriers to entry C) Heavy barriers to entry D) Barriers to entry do not apply to market structures

2. Monopolistic competition is:

A) Allocatively efficient, productively efficient B) Allocatively inefficient, productively efficient C) Allocatively efficient, productively inefficient D) Allocatively inefficient, productively inefficient

3. An examples of products in a monopolistically competitive market is:

A) Erasers and pencils B) Pencils and Mechanical pencils C) Books and clothes D) Clothes and pencils