TAILIEUCHUNG - Ten Principles of Economics - Part 39

Ten Principles of Economics - Part 39. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 17 MONOPOLISTIC COMPETITION 391 Goldman notes that these arguments are clear enough and sound as if they might have been written by a bourgeois apologist. I QUICK QUIZ How might advertising make markets less competitive How might it make markets more competitive Give the arguments for and against brand names. CONCLUSION Monopolistic competition is true to its name It is a hybrid of monopoly and competition. Like a monopoly each monopolistic competitor faces a downwardsloping demand curve and as a result charges a price above marginal cost. As in a competitive market however there are many firms and entry and exit drive the profit of each monopolistic competitor toward zero. Because monopolistically competitive firms produce differentiated products each firm advertises in order to attract customers to its own brand. To some extent advertising manipulates consumers tastes promotes irrational brand loyalty and impedes competition. To a larger extent advertising provides information establishes brand names of reliable quality and fosters competition. The theory of monopolistic competition seems to describe many markets in the economy. It is somewhat disappointing therefore that the theory does not yield simple and compelling advice for public policy. From the standpoint of the economic theorist the allocation of resources in monopolistically competitive markets is not perfect. Yet from the standpoint of a practical policymaker there may be little that can be done to improve it. Summary A monopolistically competitive market is characterized by three attributes many firms differentiated products and free entry. The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways. First each firm has excess capacity. That is it operates on the downward-sloping portion of the average-total-cost curve. Second each firm charges a price above marginal cost. Monopolistic competition does not have all the .

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