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 13 of 13
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Table 1 lists similarities and differences among perfect competition, monopolistic competition, and monopoly
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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
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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
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The theory of monopolistic competition
· describes most markets in the economy
· does not yield simple and compelling advice for public policy (government control)
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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