329 Some things to keep in mind

There is quite a lot in Chapters 9 and 10. Here are some basics to keep in mind:

Regarding Monopolistic Competition:

• There are many firms producing similar, but slightly differentiated, output. (Big Macs and Whoppers). Brand image and loyalty is key.
• Firms have some control over price and output decisions. In order to sell more, firms must lower price. Therefore, marginal revenue is below price.
• The profit maximizing rate of output is where MC = MR.
• There are few barriers to entry.
• Economic profits are possible in the short run, but will disappear as firms enter the industry.
• No firm will ever produce at minimum average cost, so there is some inefficiency.

Regarding Monopoly:

• Barriers to entry keep other competitors away.
• Monopolies face downward sloping demand. To sell more they must lower price.
• Profit max rate of output is where MC = MR.
• Long run economic profits are possible.
• Monopolies can lose money.
• Monopolies grow very large so there may be benefits from monopoly power as economies of scale are realized.

“Original document by Peter Turner licensed CC BY”