Chapter 16

Chapter 16 adds on to the previous chapter by analyzing the behavior and traits of monopolistic competitive market. An oligopoly is when there are only a few firms selling a good that is similar or identical. However, a monopolistic competitive market has many firms that sell the same good that is similar, but not identical. Another characteristic along with many sellers and product differentiation is the fact that firms have free entry and exit. However, because of this, in the long run the number of firms in a market balances out to the point in which economic profits are not zero. However, since it is economic profits being zero, accounting profits is still positive as they do not include fixed costs like economic profits. Unlike perfectly competitive markets, a monopolistic competitive market has a downward sloping demand due to the fact that the goods in a monopolistic competitive market are not identical. This allows for profit maximization to occur. When analyzing the graphs for a firm in a market, if the average total cost curve is below the demand curve or "price," then it is making a profit, but if the average total cost curve is above the price, then the firm is making losses. However, just like monopolies, since the  price is over marginal cost, it deters some possible consumers from purchasing the good, leading to a deadweight loss. However, this cannot be fixed by regulation as it is like regulating natural monopolies in which the monopolies price would be lowered to that of its marginal cost, meaning losses for the firm.