Market structure in which only a few sellers offer similar or identical products

Ologopolists Concerns:

What its competitors are doing, How its competitors would to what it might do

Monopolistic Competition:

Market structure in which many firms sell products that are similar but not identical (Many sellers, Product differentiation, Free entry and exit)

Percentage of total output in the market supplied by the 4 largest firms

4-firm Concentration Ratios of 90% or more Industries:

Aircraft manufacturing, Tobacco, Passenger car rentals, Express delivery services

Monopolistically Competitive Firm in the Short Run:

Profit maximization: Produce Q where MR = MC, Uses demand curve to find price, P > ATC: Profit, P < ATC: Loss

Long Run Equilibrium:

When firms are making profits, new firms have incentive to enter the market

Demand curve shifts left (long-run):

Firms experience declining profits; When firms are making losses, firms have incentive to exit

Demand curve shifts right (long-run):

Firms experience greater profits; Entry and exit continues until the firms in the market make zero economic profit

Once Entry and Exit have Driven Profit to Zero:

Demand curve is tangent to ATC-Curve, At Q where MR = MC, P = ATC

Profit maximization requires MR = MC and downward-sloping demand curve makes MR < P

Free entry and exit drive economic profit to zero in the long run

Q- at minimum ATC (efficient scale), P = MC

Monopolistic Competition and the Welfare of Society:

Inefficiency of markup price over MC (deadweight loss), Inefficiency of number of firms (+ Product-variety externality, - Business-Stealing externality)

Amount of Advertising:

When firms sell differentiated products and charge prices above marginal cost, each firm has an incentive to advertise to attract more buyers

Critiques of Advertising:

Firms advertise to manipulate people’s tastes (psychological, desirable), Impedes competition (makes demand less elastic)

Defense of Advertising:

Provide information to customers, Fosters competition

Advertising as a Signal of Quantity:

Large amount of money of advertising can be a signal to consumers about quality (little apparent information, advertising content is irrelevant)

Spend more on advertising, charger higher prices than generic substitutes (Products aren't differentiated, Consumer info about quality; firms incentive)

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ECON EXAM 3 (C17)

Question	Answer
Oligopoly:	Market structure in which only a few sellers offer similar or identical products
Ologopolists Concerns:	What its competitors are doing, How its competitors would to what it might do
Monopolistic Competition:	Market structure in which many firms sell products that are similar but not identical (Many sellers, Product differentiation, Free entry and exit)
Concentration Ratio:	Percentage of total output in the market supplied by the 4 largest firms
4-firm Concentration Ratios of 90% or more Industries:	Aircraft manufacturing, Tobacco, Passenger car rentals, Express delivery services
Monopolistically Competitive Firm in the Short Run:	Profit maximization: Produce Q where MR = MC, Uses demand curve to find price, P > ATC: Profit, P < ATC: Loss
Long Run Equilibrium:	When firms are making profits, new firms have incentive to enter the market
Demand curve shifts left (long-run):	Firms experience declining profits; When firms are making losses, firms have incentive to exit
Demand curve shifts right (long-run):	Firms experience greater profits; Entry and exit continues until the firms in the market make zero economic profit
Once Entry and Exit have Driven Profit to Zero:	Demand curve is tangent to ATC-Curve, At Q where MR = MC, P = ATC
P > MC:	Profit maximization requires MR = MC and downward-sloping demand curve makes MR < P
P = ATC:	Free entry and exit drive economic profit to zero in the long run
Perfect Competition:	Q- at minimum ATC (efficient scale), P = MC
Monopolistic Competition and the Welfare of Society:	Inefficiency of markup price over MC (deadweight loss), Inefficiency of number of firms (+ Product-variety externality, - Business-Stealing externality)
Amount of Advertising:	When firms sell differentiated products and charge prices above marginal cost, each firm has an incentive to advertise to attract more buyers
Critiques of Advertising:	Firms advertise to manipulate people’s tastes (psychological, desirable), Impedes competition (makes demand less elastic)
Defense of Advertising:	Provide information to customers, Fosters competition
Advertising as a Signal of Quantity:	Large amount of money of advertising can be a signal to consumers about quality (little apparent information, advertising content is irrelevant)
Brand Names:	Spend more on advertising, charger higher prices than generic substitutes (Products aren't differentiated, Consumer info about quality; firms incentive)

Created by: IanMcCormick20

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