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Understanding Monopolistic Competition Economics

Learn about monopolistic competition where many firms act independently with differentiated products. Explore entry/exit dynamics, short-run outcomes, advertising rationale, and long-run equilibrium concepts in this economic model.

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Understanding Monopolistic Competition Economics

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  1. Monopolistic Competition Many firms (small market share each). Acting independently (no collusion). Products are differentiated. a. Actual differences in products. b. Service. c. Location. d. Brand name. 4. Easy entry and exit (no barriers).

  2. Long-run equilibrium in monopolistic competition: • MC Price • ATC • PM • D • MR 0 • QM • Quantity

  3. Monopolistic competition: short-run profit. • MC Price • ATC • PM Profit • D • MR 0 • QM • Quantity

  4. Monopolistic competition: short-run loss. • MC Price • ATC • PM Loss • D • MR 0 • QM • Quantity

  5. Why do monopolistically competitive firms advertise? 1. To differentiate their product. 2. To increase consumer preference for their product. a. Increases demand. b. Makes demand less elastic.

  6. Why do monopolistically competitive firms advertise? To increase demand. • MC Price • ATC • PM • D • MR 0 • QM • Quantity

  7. Why do monopolistically competitive firms advertise? To make demand less elastic. • MC Price • ATC • PM • D • MR 0 • QM • Quantity

  8. Monopolistic competition: long-run economic profit= 0. • MC Price • ATC • PM • D • MR 0 • QM • Quantity

  9. Inefficiency and Monopolistic Competition 1. Doesn’t achieve productive efficiency because Price > Minimum ATC. 2. Doesn’t achieve allocative efficiency becausePrice > MC.

  10. Inefficiency and Monopolistic Competition 3. Each firm has “excess capacity.” It is not producing at minimum ATC. There are too many firms producing too little quantity each. Excess Capacity

  11. Study Question #2: Comparing Monopolistic Competition and Perfect Competition. • MC Price • ATC • PM • PP • DP • DM 0 • QP • QM • MR • Quantity

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