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Economics 1022A/B Lecture Notes - Lecture 3: Perfect Competition, Marginal Revenue, Demand Curve

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viridiancat881
14 Jan 2018
School
Western University
Department
Economics
Course
Economics 1022A/B
Professor
Bruce Hammond

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ECON 1022A/B Full Course Notes
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ECON 1022A/B Full Course Notes
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Document Summary

Monopolistic competition is a market structure in which: Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry. Presence of large number of firms has three implication for the firms in the industry small market share, ignore other firms, & collusion impossible. Each firm supplies small part of total output. Thus has limited power to influence price. Price can only deviate by relatively small amount. Must be sensitive to average market price of product, but not to one individual competitor. No single firm can dictate market conditions. Firms would like to be able to conspire to fix a higher price called collusion. Coordination is difficult and collusion is not possible. Product differentiation is practiced if a firm makes a product that is slightly different from the products of competing firms. Enables a firm to compete w/other firms in three areas: product quality, price, and marketing.

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Related Questions

1. A monopoly market structure is characterized by

a. large number of firms, standardized products, easy entry and exit.

b. large number of firms, differentiated products, easy entry and exit.

C. small number of firms, standardized or differentiated products, difficult entry.

d. one firm, a unique product without close substitutes, and impossible entry.

e. one firm, differentiated product, impossible entry.

 

2. Which of the following is not a characteristic of monopolistic competition?

a. Differentiated products

b. A downward-sloping demand curve for individual firms

c. Firms that are price makers

d. Impeded entry into the industry

e. A large number of firms

 

3. One factor that distinguishes oligopoly from other market structures is

a. the ease of entry into the market.

b. the interdependence of firms.

c. the slope of the demand curve.

d. the degree of product differentiation.

e. the amount of advertising expenditures.

 

13. If a monopolistic competitor is producing an output for which marginal revenue is $40 and the marginal cost is $32, to maximize profits the firm should
A. decrease the level of output.
B. keep the level of output constant.
C. continue to make $8 per unit.
D. increase the level of output.

14. A monopolistic competitor will not make an economic profit unless
A. it engages in price discrimination.
B. its marginal revenue is greater than its marginal cost.
C. it faces an inelastic demand curve.
D. its price is greater than its average total cost.

15. The definition of monopolistic competition includes
A. few firms and ease of entry and exit.
B. few firms and barriers to entry and exit.
C. many firms and barriers to entry and exit.
D. many firms and ease of entry and exit.

16. Characteristics of monopolistic competition include all of the following except
A. significant barriers to entry.
B. a relatively large number of sellers and buyers.
C. small market share for each seller.
D. differentiated products.

If I were to open a business, I would choose the monopolistic competitive market.

Under monopolistic competition, with low barriers to entry and low capital requirements, firms are free to enter into or exit from the industry at any time. In addition, in monopolistic competition, large numbers of sellers offer closely related but not homogeneous products. This is the reason why each firm has a limited share of the market and has limited control over the market price. Thus, changes in one firm’s output have only a slight impact on market price or it also means that firms in monopolistic competition are price setters rather than price takers. In the short run, firms can make excess economic profits. However, as barriers to entry are low, other firms have an incentive to enter the market, increasing the competition, until overall economic profit is zero.

In order to yield the greatest profit, a firm engaged in monopolistic competition will focus on product quality, location, service, and advertising, since the major tool of competition is product differentiation. For example, if I opened a restaurant, the restaurant would have a menu with different dishes and different prices to other restaurants nearby and the prices of the dishes also would depend on its location, the food ingredients, the food quality, and the speed of service. With the purpose of gaining profit for the restaurant, I would try to be dynamically efficient, innovative and develop new ways to attract and retain local custom as well as maintain cost efficiency, which could keep the cost below the average profit.


I need a peer reply for this discussion and it should be 250 at least