Monopolistic Competition Ready
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Transcript of Monopolistic Competition Ready
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7/31/2019 Monopolistic Competition Ready
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MONOPOLISTIC COMPETITION
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Monopolistic Competition
Where the conditions of perfect competitiondo not hold, imperfect competition will exist
Varying degrees of imperfection give rise to
varying market structures Monopolistic competition is one of these
not to be confused with monopoly!
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FEATURES OF MONOPOLISTIC
COMPETITION
Large number of firms in the industry May have some element of control over price due to
the fact that they are able to differentiate their product
in some way from their rivals products are thereforeclose, but not perfect, substitutes
Entry and exit from the industry is relatively easy few barriers to entry and exit
Consumer and producer knowledge imperfect
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Characteristics of Monopolistic
Competition
Product Differentiation Each firm makes a productthat is slightly different from the products ofcompeting firms.
-- Close substitutes but no perfect substitutes
-- An attempt to increase price will normally resultsin a lower volume sold
Competition on Quality, Price, Marketing
-- Quality is design, reliability, service provided tobuyer and ease of access to product
-- Price downward sloping demand curve-- Marketing firm must market = promotion,distribution, packaging
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Product Differentiation
Product differentiation is crucial to monopolistic competition
People value variety, even if it is not material (real)
Product differentiation takes place in buyers mind
INDIANS are provided with a wide variety of products andservices
Variety is valued but costly we pay for it
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Basis for Product Differentiation
Physical differences
Convenience
Ambience
Reputations Appeals to vanity
Unconscious fears and desires
Snob appeal
Customized products
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EQUILIBRIUM UNDER MONOPOLISTIC
COMPETITION
Since the Monopolistic Competitor prices at demandwhere MR=MC, the firm may have
1. excess production capacity, and is2. operating below its efficient scale where ATC is
minimum
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p
QO Qs
AR= D
MC
AC
MR
Short-run equilibrium - profitShort-run equilibrium - profit
Ps
ACs
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SHORT RUN EQUILIBRIUM - LOSS
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Short run equilibrium of the firmShort run equilibrium of the firm
MR
R & C
QO QL
P
LRAC
LRMC
AR
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Long Run: Zero Economic Profit
Economic profit induces entry and economicloss induces exit, as in perfect competition.
Entry decreases the demand for the product ofeach firm.
Exit increases the demand for the product ofeach firm.
In the long run, economic profit is competed
away and firms earn normal profit..
LONG RUN EQUILIBRIUM
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Long-run equilibrium of the firmLong-run equilibrium of the firm
AR= D
MR
R & C
QO QL
P
LRAC
LRMC
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Advertising and Branding
Whats to be gained by pouring money into advertising? Itworks!
-- Continuous signals regarding productdifferentiation
-- coca-cola vs pepsi
Advertising can affect the level of demand and priceelasticity of demand it is an alternative to price reductionas a means of selling more increasing profits . As a result ofadvertising each firm will produces more and this will
reduces excess capacity in its industry
Brand has tremendous value
-- Brands tend to capture in a single name all the
values a firm wants to impress upon the buyer
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IMPACT OF ADVERTISING
COST
OUTPUTO
AC1
AC2
Average cost = production cost + selling cost
output
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THANK YOU