UWG ECON 2106 - Monopolistic Competition (35 pages)

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Monopolistic Competition



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Monopolistic Competition

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Pages:
35
School:
University of West Georgia
Course:
Econ 2106 - Principles of Microeconomics
Principles of Microeconomics Documents

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CHAPTER CHECKLIST When you have completed your study of this chapter you will be able to 1 2 3 Describe and identify monopolistic competition Explain how a firm in monopolistic competition determines its output and price in the short run and the long run Explain why advertising costs are high and wy firms use brand names in monopolistic competition 15 1 WHAT IS MONOPOLISTIC COMPETITION Monopolistic competition is a market structure in which A large number of independent firms compete Each firm produces a differentiated product Firms compete on product quality price and marketing Firms are free to enter and exit 15 1 WHAT IS MONOPOLISTIC COMPETITION Large Number of Firms Like perfect competition the market has a large number of firms Three implications are Small market share No market dominance Collusion impossible 15 1 WHAT IS MONOPOLISTIC COMPETITION Product Differentation Product differentiation Making a product that is slightly different from the products of competing firms A differentiated product has close substitutes but it does not have perfect substitutes When the price of one firm s product rises the quantity demanded of that firm s product decreases 15 1 WHAT IS MONOPOLISTIC COMPETITION Competing on Quality Price and Marketing Quality Design reliability service ease of access to the product Price A downward sloping demand curve Marketing Advertising and packaging 15 1 WHAT IS MONOPOLISTIC COMPETITION Entry and Exit No barriers to entry A firm cannot make economic profit in the long run 15 1 WHAT IS MONOPOLISTIC COMPETITION Identifying Monopolistic Competition Two indexes The four firm concentration ratio The Herfindahl Hirschman Index 15 1 WHAT IS MONOPOLISTIC COMPETITION The four firm concentration ratio The percentage of the value of sales accounted for by the four largest firms in the industry The range of concentration ratio is from almost zero for perfect competition to 100 percent for monopoly A ratio that exceeds 40 percent indication of oligopoly



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