Chapter 25 Monopolistic Competition

A more concise One-Page Test Review Chapter 25 may help.  Updated 7/30/17    


I. Introduction
    A. A monopolistically competitive market exists when a substantially large number of firms
         serve a market with relatively differentiated products.
    B. An example would be merchandising firms of all types selling products such as shoes,
         shirts, TV's, groceries, etc.
    C. Product differentiation
        1.Some feel it is real and important while others feel it is artificial and unimportant.
        2. Examples
            a. Non-price competition
               1. Product quality
               2. Product image (Branding)
               3. Customer service
               4. Store environment and image
           b. Condition for sale (location)
               1. Mail order
               2. Home delivery using the internet
               3. Bidding on the internet
   D
. Some control over price exists and demand tends to be more elastic than with monopoly
        or oligopoly markets.

 

E, Examples

Source /firstquarterfinance.com

 

 

II. Monopolistic competition

III. Economic analysis of monopolistic competition
      A. P is high compared to pure competition (P> MR = MC)
      B. Quantity will be restricted causing ATC to be higher than that indicated by the curve's lowest point.
      C. Tends to be more competitive than monopoly and oligopoly.
      D. Some believe economic profit tends toward zero as the number of firms adjust to varying profit levels.
      E.
Econ Concepts in 60 Seconds Video on Monopolistic Competition in the Long-Run

IV. Value of advertising to emphasize product differentiation.

Positive Negative
Informs potential customers Persuades potential 
Finances national communication Social costs (billboards) 
Rewards and thus stimulates technological advancement and innovation Adds little to a product
Increases output resulting in economies of scale and lower ATC  Ads cancel each other's effect, output doesn't change, ATC increases
Promotes spending and employment Promotes of spending can not be proven.
 Consumer Protection, False Advertising from the Florida Attorney General.

V.  Monopolistic competition in international trade - from wiki

VI. A free business game about monopolistic competition from Economics Web Institute

VII. Monopolistic Competition and Oligopoly multiple choice practice questions.

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