Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no...

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Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences in products. b. Service. c. Location. d. Brand name. 4. Easy entry and exit (no barriers).

Transcript of Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no...

Page 1: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Monopolistic Competition

1. Many firms (small market share each).2. Acting independently (no collusion).3. Products are differentiated.

a. Actual differences in products.b. Service.c. Location.d. Brand name.

4. Easy entry and exit (no barriers).

Page 2: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Long-run equilibrium in monopolistic competition:

Pric

e

Quantity0

D

MRQM

MC

PM

ATC

Page 3: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Pric

e

Quantity0

Monopolistic competition: short-run profit.

DMR

QM

MC

PM

ATCProfit

Page 4: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Pric

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Quantity0

Monopolistic competition: short-run loss.

DMR

QM

MC

PM

ATC

Loss

Page 5: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Why do monopolistically competitive firms advertise?

1. To differentiate their product.2. To increase consumer preference for

their product.a. Increases demand.b. Makes demand less elastic.

Page 6: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Pric

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Quantity0

Why do monopolistically competitive firms advertise? To increase demand.

D

MRQM

MC

PM

ATC

Page 7: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Pric

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Quantity0

D

MRQM

MC

PM

ATC

Why do monopolistically competitive firms advertise? To make demand less elastic.

Page 8: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Pric

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Quantity0

Monopolistic competition: long-run economic profit = 0.

DMR

QM

MC

PM

ATC

Page 9: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Inefficiency and Monopolistic Competition

1. Doesn’t achieve productive efficiency because Price > Minimum ATC.

2. Doesn’t achieve allocative efficiency becausePrice > MC.

Page 10: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Inefficiency and Monopolistic Competition

3. Each firm has “excess capacity.” It is not producing at minimum ATC. There are too many firms producing too little quantity each.

Excess Capacity

Page 11: Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences.

Pric

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Quantity0

Study Question #2: Comparing Monopolistic Competition and Perfect Competition.

DM

MRQM

MC

PM

ATC

DP

QP

PP


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