Chapter 16 Journal

In chapter 16, Mankiw introduces a new economic system that differs from perfectly competitive markets and monopolies. Chapter 16 focuses on monopolistically competitive markets, one type being an oligopoly. Monopolistically competitive markets are characterized by having many firms, differentiated products, and free entry. Now for monopolistically competitive markets, the equilibrium differs from perfectly competitive markets in two ways. One is that each firm in a monopolistically competitive market has excess capacity. That is, it operates on the downward sloping portion of the average total cost curve. Secondly, each firm charges a price above marginal cost. In monopolistically competitive markets, there are deadweight losses resulting from the fact that the price is set above the marginal cost. Additionally, the number of firms can be too large or too small, and these inefficiencies are hard to correct by the government. The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to manipulate consumers’ tastes and to reduce competition. Defenders of advertising and brand names argue that firms use them to inform consumers and to compete more vigorously on price and product quality. I would give this chapter a difficulty rating of 1/3 as there is not really any new complicated material. It contains the same content except we are just applying it differently.