When does Average Revenue = Price
In the long run for all four market structures
What’s the Price Effect?
the change in revenue that results from a price change
What’s the Output Effect?
The change in revenue from being able to produce and sell more units.
What do the demand and marginal revenue curves look like for a monopolistically competitive firm?
Demand curve is downwards sloping, MR is lower than D.
Why is there a downwards sloping demand curve as opposed to a flat demand curve for a monopolistically competitive firm?
- Differentiated product means the firms can raise prices without demand going directly to zero
- Products are not so differentiated that there’s no substitution effect if they raise prices too high.
When is the MR curve below D?
The marginal revenue curve is always below the demand curve when the firm has the ability to affect price.
How much power do firms have over price with Monopolistic Competition?
Only a bit - still a strong substitution effect.
- Products are differentiated but not so much so that the firms can act like monopolies.
- too many firms for collusion
How do monopolistically competitive firms choose P & Q?
- MR = MC for Q
- From Q find P on D
How do we know visually how much profit a monopolistically competitive firm is making?
- They’ll produce at Q of MR = MC, then go up to D for P
- Distance between D and ATC is their profit or loss.
What happens to economic profits in the long run for a monopolistically competitive firm?
- other firms will enter the market shifting the residual demand curve (& MR) to the left, and making it more elastic because there’s now more substitutes.
- D will shift far enough left that it is tangent to ATC
- D = ATC @ Q where MR = MC, but at a higher P than MR = MC
What’s the difference in price for Monopolistic Competition vs Perfect Competition?
- Monopolistic Competition: P > MC
Perfect Competition: P = MC - Monopolistic Competition: More choice of price
Perfect Competition: Firm is a price-taker
What is the difference between Monopolistic Competition and Perfect Competition when it comes to Q, in the long run?
Monopolistic Competition: Q @ MR = MC but this Q is below Q@ min. ATC
Perfect Competition: Q @ minimum ATC
What is the efficiency difference between Monopolistic Competition and Perfect Competition?
Monopolistic Competition: excess capacity because not producing at minimum ATC. Marginal benefit to consumer (D) > MC so some loss of efficiency.
Perfect Competition: Productively efficient because producing at minimum ATC. Allocatively efficient because consumer marginal benefit (D) = MC.
What’s the benefit and cost of Monopolistic Competition vs Perfect Competition?
Monopolistic Competition: increased consumer wellbeing due to plethora of choices to perfectly suite a wide variety of consumer needs.
Perfect Competition: productively and allocatively efficient.
What are the general marketing activities?
- what to produce
- design
- ads
- distribution
- monitoring consumer preferences
What are the two main methods of differentiating a product or firm?
- Brand Management
- Advertising
What is brand management?
Actions of a firm intended to maintain product differentiation over time.
Extends the time within which an economic profit may be earned.
What is a drawback of trademarks?
Can be hard to enforce especially internationally.
If brand becomes the household name for a category of product, the brand name is no longer protected.
What does advertising do for a monopolistically competitive firm?
- reduces the elasticity of the residual demand curve
- shifts the residual demand curve outwards
What makes a firm successful?
- Differentiating
- Lower ATC than competition
- Factors beyond the firm’s control
- Value created relative to competitors
- Chance events
What are some of the factors beyond a firm’s control, that would influence it’s success?
- Input costs
- Shifts in consumer tastes
- Marketing efforts of rival firms
- Chance events such as hurricanes, etc.
Where does MR intersect ATC?
Where ATC is at it’s lowest.
How do we know a firm is allocatively efficient?
Marginal benefit (D) = MC
