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 10 of 13 … Every day we are surrounded by advertising, firms trying to convince us to buy their products. This is natural for monopolistic competition as well as some oligopolistic industries. When firms sell differentiated products and charge prices above marginal cost each firm has an incentive to advertise to attract more buyers to its product. Firms that sell highly differentiated consumer goods such as medical drugs, perfumes, soft drinks, razor blades, breakfast cereals typically spend between 10 and 20 percent of revenue for advertising. Firms that sell industrial products such as drill presses and communications satellites typically spend very little on advertising. Firms that sell homogeneous products, such as wheat, peanuts, or crude oil, rarely spend any amount. Overall, about two percent of t...
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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 9 of 13 … We have evaluated markets from the view of efficiency, whether society is getting the most from scarce resources. We noted in the two extreme cases · perfectly competitive markets lead to efficient outcomes, unless there are externalities such as pollution · monopoly markets create deadweight losses, due to pricing above marginal cost Monopolistically competitive markets are more complex, so evaluation of welfare in these markets is subtler. … Per Figure 3a one source of deadweight loss inefficiency is the markup of price above marginal cost. Some potential consumers value the good at more than the marginal cost of production but less than the price. Because of the higher price these are deterred from buying the good. Thus, a monopolistically competitive market has the deadweight loss of monopo...
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 8 of 15 … Two main differences between monopolistic and perfect competition are 1· excess capacity 2· markup over marginal cost … 2· Markup Over Marginal Cost (MC) Figure 4 panel (b), for a perfectly competitive firm, price (P) always = MC. Figure 4 panel (a), for a monopolistically competitive firm, P can be above, equal to, or below MC … The long-run zero-profit equilibrium condition shown in Figure 4 · ensures P equals average total cost (ATC), not necessarily lowest possible ATC · does not ensure P = MC In the long-run equilibrium, monopolistically competitive firms · operate on the declining portion of their ATC curves · so MC is below ATC When P = ATC, P > MC. … … long run and short run chōki to tanki 長期と短期
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 7 of 15 … Figure 4 - Monopolistic Competition versus Perfect Competition Panel (a) Monopolistically Competitive Firm · shows the long-run equilibrium in a monopolistically competitive market · the firm produces a quantity less than the efficient scale · price (P) is above marginal cost (MC) Panel (b) Perfectly Competitive Firm · shows the long-run equilibrium in a perfectly competitive market · the firm produces a quantity at efficient scale, where average total cost (ATC) is minimum At efficient scale, P = ATC = MC … Two main differences between monopolistic competition and perfect competition are, in monopolistic competition the firm 1· has excess capacity 2· sets price higher than marginal cost … 1· Excess Capacity Per panel (a) in a monopolistically competitive market · suppliers’ free entry into and...
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 6 of 15 … Figure 3 - A Monopolistic Competitor in the Long Run In a monopolistic competition market if firms are making economic profits new firms enter and the demand curves for the incumbent firms shift to the left. If firms are making losses those firms exit the market and the demand curves for the remaining firms shift to the right. A monopolistically competitive firm because of these shifts in demand eventually is in the long-run equilibrium shown in Figure 3. In this long-run equilibrium · price (P) equals average total cost (ATC) · the firm earns zero economic profits … Figure 3 shows the long-run equilibrium in a monopolistic competition market. Once the market reaches this equilibrium · because there are zero economic profits · new firms have no incentive to enter · existing firms have no incent...
Why does the Federal Reserve and the central banks of many countries target a two percent inflation rate rather than zero percent? ChatGPT: Federal Reserve deliberately targets 2% inflation rate as part of their monetary policy goals. Here's why a 2% inflation rate is targeted: 1. Avoids Deflation Deflation (falling prices) can be dangerous—it encourages people to delay spending, which slows the economy and can lead to job losses. A small positive inflation rate avoids this trap. 2. Keeps Wages Flexible Employers often avoid cutting wages outright. With 2% inflation, real wages can fall modestly without needing nominal wage cuts, helping reducing business costs and avoiding labor friction. 3. Encourages Spending and Investment Mild inflation erodes the value of money over time, encouraging people to spend or invest rather than hoard cash. This helps drive economic growth. 4. Room to Cut Interest Rates With some inflation, nominal interest rates stay above zero, giving central ban...
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 5 of 15 … Figure 2 – Monopolistic Competitors in the Short Run Monopolistic competitors maximize profit, or minimize loss by producing the quantity at which marginal revenue (MR) equals marginal cost (MC). The firm in panel (a) makes a profit because price at quantity A is above average total cost (ATC). The firm in panel (b) makes a loss because price at quantity B is below ATC. … In a monopolistically competitive market in the short run each firm is in some ways like a monopoly. Each firm’s product is different from those offered by others so it faces a downward-sloping demand curve. The monopolistically competitive firm follows a monopolist's rule for profit maximization. It chooses to produce the quantity where MR equals MC. Then it determines and uses its demand curve to find the price for that quan...
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 4 of 15 … Figure 1 summarizes the four types of market structure. 1-Monopoly – the market when there is only one supplying firm and one product. 2-Oligopoly – the market when there are only a few supplying firms offering a similar product. 3-Monopolistic competition – many firms selling differentiated products 4-Perfect competition – many firms supplying an identical product … 3-Monopolistic competition, the subject of this chapter Monopolistic competition markets have these attributes · many sellers compete for the same group of customers · each firm produces a product at least slightly different from products of other firms · each firm has a monopoly over the product it makes · firms are price makers facing a downward-sloping demand curve · firms can freely enter or exit the market · the number of firm...
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 3 of 15 … Previously we saw in a perfectly competitive market · firms are price takers, they must accept the market price and cannot influence the price · the price always equals the production marginal cost · in the long run firms entry into and exit out of the market drives economic profit to zero leaving only a normal profit for each firm · in the long run the price equals average total cost We saw in a monopoly market · firms are price makers, they are able to set prices · firms can use their market power to keep prices above marginal cost · leading to an economic profit for the firm · leading to a deadweight loss for society … Perfect competition and monopoly are the market extreme forms. Perfect competition occurs when there are many firms in a market supplying identical products. Monopoly occurs w...