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Unit 4 ECO11 - Coggle Diagram

- - - - Small market shares
      - Independent action
      - No collusion
    - - Service
      - Location
      - Product attributes
      - Brand names and packaging
      - Some control over price
    - - Low capital requirements
      - Trade marks and brand names can be a difficulty
    - - Tool used to show product differentiation
      - Successful advertising- firm's demand curve shifts right and becomes steeper, implying that demand will become less elastic at every possible price.
      - Advertising is a variable cost that shifts AVC and ATC to the left (upward)
    - - P > min ATC is a condition for productive inefficiency (Equality of price and minimum average total cost)
      - P > MC is a condition for allocative inefficiency (right amount of output being produced, and thus the right amount of scarce resources is devoted to this specific use.
      - *Excess capacity
      - In the long run, a monopolistic competitor fails to achieve allocative efficiency and productive efficiency
      - Productive efficiency in monopolistically competitive markets does not occur in the long run because firms set the price on the demand curve where MR=MC to maximize economic profit, making output less than optimal from society's perspective.
      - Excess capacity is best described as underused plant resources that are a result of a firm producing less output than what is associated with achieving minimum average total cost. (Identified by the gap between the minimum-ATC output and the profit maximizing output identifies excess capacity.
      - Monopolistically competitive firms are not productively efficient because output is less than society's optimal level because a producer's average total cost per unit is not at its lowest possible cost
      - Monopolistically competitive firms do not achieve allocative efficiency because the price for a monopolistically competitive firm exceeds the marginal cost
    - - The firm's demand curve
        
        Highly, but not perfectly elastic like that of a pure competitor
        
        Not perfectly elastic because 1. monopolistic competitor has fewer rivals 2. Its products are differentiated, so they are not perfect substitutes.
        
        More rivals and weaker product differentiation results in greater price elasticity of seller's demand- that is, the closer monopolistic competition will be to pure competition.
    - - Produce at level of output where MR=MC
    - - Firms enter a profitable monopolistically competitive industry and leave an unprofitable one. In other words, a monopolistic competitor will only break even in the long run.
    - - Profits- New firms enter, as they do demand curve shifts left (falls) because each firm has a smaller share of total demand and now faces a larger number of close substitute products.
      - Losses- Firms leave, with fewer substitutes total demand increases, the surviving firms will see their demand curves shift to the right (rise)
    - - In monopolistic competition, the gap between the minimum- ATC and the profit maximising output identifies excess capacity (plant and equipment that are underused because firms are producing less than the minimum-ATC output
  - - - Firm produces as much or as little as they wish at the market price
      - Demand graphs as horizontal line (can sell as much output as they want, as long as it is at the market price)
      - Perfectly elastic demand
    - - Average revenue- Revenue per unit. Price and average revenue is the same thing for a purely competitive firm.
      - Total revenue- Multiply price by the corresponding quantity that firm can sell. ( A straight line that slopes upwards to the right)
      - Marginal revenue- Change in total revenue that results from selling one more unit of output. In pure competition marginal revenue and price are equal.
    - - Compare marginal revenue and marginal cost
      - Compare total revenue and total cost
    - - If so, in what amount
      - What economic profit or loss will we realize
      - Should we produce this product
    - - The firm compares the amounts that each additional unit of output will add to total revenue and total cost. In other words the firm compares the marginal revenue and marginal cost of each successive unit of output.
      - In the initial stages of production, where output is relatively low, marginal revenue will usually exceed marginal cost. At later stages, rising marginal costs will exceed marginal revenue.
      - Output-determining rule- As long as producing some positive amount of output is preferable to shutting down and producing nothing, the firm will maximise profit or minimize loss in the short run by producing the quantity of output at which marginal revenue equals marginal cost.
    - - Fixed costs are paid regardless of whether something or nothing is produced, and the firm receives enough revenue per-unit to cover AVC and some FC