Monopolistic Competition 1. Characteristics of Monopolistic Competition: Relatively Large Number of...
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Monopolistic CompetitionMonopolistic Competition
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Characteristics of Monopolistic Competition:
•Relatively Large Number of Sellers•Differentiated Products•Some control over price •Easy Entry and Exit (Low Barriers)•A lot of non-price competition (Advertising)
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PerfectCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
PureMonopoly
MonopolisticCompetition Oligopoly
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Examples:1. Fast Food Restaurants2. Furniture companies3. Jewelry stores4. Hair Salons5. Clothing Manufacturers
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Monopolistic Qualities• Control over price of own good due
to differentiated product• D greater than MR • Plenty of Advertising• Not efficient
“Monopoly” + ”Competition”
Perfect Competition Qualities• Large number of smaller firms• Relatively easy entry and exit• Zero Economic Profit in Long-Run
since firms can enter4
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• Goods are NOT identical.• Firms seek to capture a piece of the
market by making unique goods.• Since these products have substitutes,
firms use NON-PRICE Competition. Examples of NON-PRICE Competition
• Brand Names and Packaging• Product Attributes • Service• Location• Advertising (Two Goals)
1. Increase Demand 2. Make demand more INELASTIC 5
Differentiated Products
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Differentiated Products
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Review1. Identify the 4 market structures.2. Explain why D is greater than MR.3. Define Price Discrimination.4. List characteristics of monopolistic competition.5. List Monopolistic Qualities.6. List Competitive Qualities.7. List examples of non-price competition.8. List two goals of advertising.9. Name 10 types of Candy.
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Drawing Monopolistic Competition
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D
MR
MCATC
9Q
Monopolistic Competition is made up of prices makers so MR is less than Demand
In the short-run, it is the same graph as a monopoly making profit
In the long-run, new firms will enter, driving down the DEMAND for firms
already in the market.
P
Q1
P1
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D
MR
MC
10Q
P
Firms enter so demand falls until there is no economic profit
ATC
Q1
P1
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D
MR
MC
11Q
P
Firms enter so demand falls until there is no economic profit
ATC
QLR
PLR
Price and quantity falls and TR=TC
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D
MR
MC
12Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
Quantity where MR =MC up to Price = ATC
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Why does DEMAND shift?When short-run profits are made…
– New firms enter.– New firms mean more close substitutes and
less market shares for each existing firm.– Demand for each firm falls.
When short-run losses are made…– Firms exit. – Result is less substitutes and more market
shares for remaining firms.– Demand for each firm rises.
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D
MR
MC
ATC
14Q
What happens when there is a loss?
In the long-run, firms will leave, driving up the DEMAND for firms already in the
market.
P
Q1
P1
In the short-run, the graph is the same as a monopoly making a loss
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D
MR
MC
ATC
15Q
Firms leave so demand increases until there is no economic profit
P
Q1
P1
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D
MR
MC
ATC
16Q
Firms leave so demand increases until there is no economic profit
P
QLR
PLR
Price and quantity increase and TR=TC
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Are Monopolistically Competitive Firms
Efficient?
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D
MR
MC
18Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
Not Allocatively Efficient because P MC Not Productively Efficient because not producing
at Minimum ATC
QSocially Optimal
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D
MR
MC
19Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
This firm also has EXCESS CAPACITY
QSocially Optimal
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• Given current resources, the firm can produce at the lowest costs (minimum ATC) but they decide not to.
• The gap between the minimum ATC output and the profit maximizing output.
• Not the amount underproduced20
Excess Capacity
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D
MR
MC
21Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
The firm can produce at a lower cost but it holds back production to maximize profit
QProd Efficient
Excess Capacity
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Practice Question
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Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would: A) have more economic profit. B) have a loss.
C) also achieve allocative efficiency.D) be under producing. E) be in long-run equilibrium.
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• Large number of firms and product variation meets societies needs.
• Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms.
Ex: Nike might continue to make above normal profit because they are a well known brand.
Advantages ofMONOPOLISTIC COMPETITION
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FOUR MARKET MODELS
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Graphing1. Draw the graph for a monopolistic
competitive fast food restaurant making $400 total profit by selling 200 burgers at $4 each. Label D, MR, MC, Price, and Quantity.
2. Show shifts that will occur in the long-run and identify TR, TC, and profit.
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