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”