Chapter 16

Chapter 16 talks about a different economic system from those in a perfectly competitive market or a monopoly. It focuses on monopolistic competitive markets such as an oligopoly. Some characteristics of a monopolisticly competitive market is that it has many firms and free entry. This chapter also talks about two ways in which conopolistically competitive markets are different from competitive markets. One reason is that in a monopolistic competitive market, there is an excess capacity. That means that it operates on the downward sloping part of the ATC curve. Another reason it is different is that each of the firms charges a price that is above the marginal cost of the item. Because the price is set above the marginal cost in a monopolistic competitive market, there are deadweight losses as a result. Another problem is that there can be too many or very few firms which are inefficiencies that are hard to correct by the government. The chapter also talks about how brand names are a problem because firms use them to manipulate consumers and to reduce the competition. Some believe that using brand names to compete gives firms incentives to improve the quality of their products and to lower their prices as much as possible.