slide 10 Flashcards
what is monopolistic competition and what are the defining characteristics
- a relatively large number of firms
- differentiated products, highlighted with a lot of advertising
- easy to enter and exit the industry
- some control over price
why does monopolistic competition have some control over price
because the products aren’t identical and have differences that is typically highlighted through ads, firms are able to set their price in some degree
why do monopolistic competitions use a lot of advetisments
firms need to
- show the differences in their product and increase their own demand
what is degree of industry concentration
it is a method of measuring the type of industry we are in (monopolistic competition vs oligopoly)
we will look at the largest firms in the industry and see how much they contribute to the industry’s output.
The more they contribute the closer you are to an oligopoly industry
there are ways to measure concentration in an industry, one of the is the four-firm concentration ratio
what is it
in this measure, we will look at how much of the industry’s output is provided by the four largest firms.
if the ratio is near 0 we have a perfect competition, if we have 100 we have a monopoly
what is the Herfindahl - Hirschman Index (HHI)
the sum of the squared percentage market shares of all the firms in the industry
the values on this index will range from 0 to 10,000
the lower the index the greater the likelihood the industry is monopolistically competitive rather than oligopolistic
in perf competition: HHI = 0
In monopoly HH1 = 10,000
how does advertising affect a firm’s cost
ads result in higher total cost,
ads will be categorized as a fixed cost because in this market firms must advertise
in a monopolistic competition, describe the demand elasticity
demand is highly elastic
less elastic than a perfect competition but a lot more elastic than a monopoly
describe the expectations of a monopolistic competition in the short run
In the short run, firms will want to maximize their profit. To do this they will produce where MR = MC. and trace up to the demand curve to find the price at which to sell at.
in the short un firms can either make a profit or a loss
if there is a profit new firms will enter. if there is loss, firms will exit
how do you calculate how much is gained in profit/ how much is loss in a monopolistic competition
MR = MC is your guide
you will follow vertically until you hit the ATC and the D curve. The space between the ATC and the D curve is the gain/loss.
If it is a gain, ATC will be below the D.
If it is a loss, D will be below the ATC
where is the profit maximizing point in a monopolistic competition
where MR = MC
describe what happens to firms in the long run if they are in a monopolistic competition
if it was a profitable industry in the short run, in the long run firms will decide to enter.
if firms enter
- each existing firms market share will decrease
- demand for firms products decrease
- lower the prices
- firms will continue to enter until P = ATC (zero economic profit)
The opposite for if firms exit
how does monopolistic competition differ from perfect competition
in a monopolistic competition there is a mark up (price > MC)
in perf. comp (price = MC)
in perf comp, quantity produced = min ATC
in monopolistic comp, produce less than min ATC
how can a firm postpone declining economic profits in the long run in a monopolistic competition
it can advertise a product that is distinguishable from other products and it can develop/improve its products.
this will delay its eventual declining economic profit
what kind of costs are advertisings
fixed costs,
there is an increase in average total costs but no change in marginal costs
