Chapter 17 introduced the ideas of monopolistic competition, but the majority of the information in this book was just a reinforcement of things we previously learned. However, like always, understanding the graphs took longer than usual for me to comprehend completely. The chapter was easy to understand and I have no questions about it. I would give it a 1.5/3 in difficulty.
The book starts with introducing monopolistic competition. Monopolistic competition is one of the four types of market structures. There are three main characteristics of a monopolistic competition: many sellers, product differentiation, and free entry. In the short run, a monopolistically competitive firm can operate with a profit or loss, or even zero economic profit. In the long run, a monopolistically competitive firm must operate at zero economic profit.
Also, the book explains monopolistically competitive firmst in the long run and short run and talks about its equilibriums, which is where the price must exceed the marginal cost. A monopolistically competitive firm wants to profit maximize, which is found in the intersection between the marginal cost and the marginal revenue. In the long run, the demand curve must always be tangent to the average total cost curve.
The book then explains the difference between a monopolistically competitive firm and perfect competition. The difference is that a monopolistic has excess capacity, while a perfectly competitive market drives firms to produce at the minimum of the ATC, not where the demand curve (which is tangent to the ATC curve) intersects the ATC curve. In order to produce at the efficient scale, the firm must be operating at the minimum of the ATC curve. A monopolistically competitive market loves getting another item sold because their price is over marginal cost. Therefore, they make profit all the time. At the same time, a perfectly competitive firm doesn’t care if it sells another item because profit from an extra unit sold is going to be zero.
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