Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART
5 Firm Behavior and the Organization of Industry
Chapter 16 of 36 Monopolistic
Competition
Section 15 of
15
…
Table 1 here
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Table 1 lists similarities
and differences among perfect competition, monopolistic competition, and
monopoly
…
Monopolistic competition is a hybrid of
monopoly and competition.
Like a monopoly, each monopolistic competitor
· faces a downward-sloping demand curve
· charges a price above marginal cost
Like perfect competition, with
monopolistic competition
· there are many firms
· entry and exit drive the profit of
each monopolistic competitor toward zero
…
Monopolistically competitive firms produce
differentiated products so firms advertise to attract customers to its own
brand.
Advertising of monopolistically
competitive firms
· to some extent manipulates consumers'
tastes, promotes irrational brand loyalty, and impedes competition
· to a larger extent provides
information, establishes brand names of reliable quality, and fosters
competition
…
The theory of monopolistic competition
· describes most markets in the economy
· does not yield simple and compelling
advice for public policy
Regarding monopolistically competitive
markets, from the standpoint of
· an economist: the allocation of
resources is not perfect, because price is higher than marginal cost
· a policymaker: there is economic deadweight
loss but it would be difficult to lessen it, regulatory controls would hurt
more than help
(end of chapter 16 of 36)
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Congratulations! … 44% of the way to becoming a competent economist…
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