Week 9 Flashcards
(17 cards)
Attributes of a monopolistic competition
Many sellers
Product differentiation
Free entry and exit
Product differentiation
Each firm produces a product that is slightly different from other firms
What curve is it
Down-ward sloping curve
Economic profits are..
Driven to zero
Short-run economic profits encourage new firms to enter the market..this means
Increases the number of products offered
Reduces demand faces by firms in the market
Demand curves shift to the left for existing firms
Their profits decline
Short-run economic profits encourage firms to exit the market..this means
Decreases the number of products offered
Increase demand faced by remaining firms
Shifts firms demand curve to the right
Increase the remaining firms profit
Long-run equilibrium
Firms will enter and exit market until firms making exactly zero economic profits
Two distinctions to perfect competition
Produce at higher average total cost
Price exceeds marginal cost
Output feature
In monopolistic competition, output is less than the efficient scale of perfect competition.
Product variety
Consumers get consumer surplus from the introduction of a new product, entry of a new firm conveys a consumers
Business externality
Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms.
When firms sell different products and charge prices above marginal cost..
each firm has an incentive to advertise in order to attract more buyers to its particular product.
Laws that restrict the behaviour of firms with market power
Competition and Consumer Act (Australia) Commerce Act (NZ)
Purpose of laws
Laws and Procedures that aim to improve social efficiency in oligopolistic and monopolistic markets.
Monopolies produce..
Less than the socially desirable quantity of output, thats why price is above marginal cost
What can the government do
use law to increase competition
regulate behaviour
turn private monopoly into public enterprise
Problems of marginal cost pricing
Taxes have deadweight loss
Average cost pricing creates deadweight loss
