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Monopolistic CompetitionMicroeconomics
TPS
Write down a list of restaurants which serve basically the same food.
Monopolistic Competition
Defining Monopolistic Competition
Somewhere between Perfect competition and an Oligopoly
Many firms but NOT as many as PC
Differentiated product
Each firm has some ability to set the price of their product.
No barriers to entry and exit.
Inefficient market
Monopolistic Competitionin the Short Run
Short-run economic profit encourages firms to enter the market TT = MR = MC at Q
P = intersection of Q and MR = MC Positive economics profit is P > ATC
Monopolistic Competition in the Short Run
Quantity0
Price
Profit-maximizing
quantity
Price
Demand
MR
ATC
Firm Makes Profit
Averagetotal cost
Profit
MC
Monopolistic Competitionin the Short Run
Short-run economic losses encourage firms to exit the market.
Negative economics losses is P < ATC
Monopolistic Competitors in the Short Run
Demand
Quantity0
Price
Price
Loss-minimizing
quantity
Averagetotal cost
Firm Makes Losses
MR
LossesATC
MC
Homework
Multiple Choice – 1, 2, 3, 5, 6, 7
Short Answer - 21
Monopolistic Competition in Long-Run Equilibrium
Firms will enter and exit until the firms are making exactly zero economic profits.
Monopolistic Competitor in the Long Run
Quantity
Price
0
DemandMR
ATC
MC
Profit-maximizingquantity
P = ATC
The demand curve is tangent to the ATC curve.
And this tangency lies vertically above the intersection of MR and MC.
Monopolistic Competitionversus
Perfect Competition Two differences
Excess capacity Markup over marginal cost
Monopolistic versus
Perfect Competition
Excess Capacity is … Firms produce less than the output at which ATC is
minimized
Monopolistic Competition versus
Perfect Competition
Quantity0
Price
Demand
Monopolistically Competitive Firm
Quantity0
Price
P = MC P = MR(demand
curve)
Perfectly Competitive Firm
MCATC
MCATC
MR
Efficientscale
P
Quantityproduced
Quantity produced =Efficient scale
Monopolistic Competition versus
Perfect Competition
Markup over Marginal Cost Markup = P - MC
More profit is generated
Monopolistic Competition versus
Perfect Competition
Quantity0
Price
Demand
Monopolistically Competitive Firm
Quantity0
Price
P = MC P = MR(demand
curve)
Perfectly Competitive Firm
Markup
MCATC
MCATC
MR
Marginalcost
P
Quantityproduced
Quantity produced
Monopolistic Competition versus
Perfect Competition
Quantity0
Price
Demand
Monopolistically Competitive Firm
Quantity0
Price
P = MC P = MR(demand
curve)
Perfectly Competitive Firm
Markup
Excess capacity
MCATC
MCATC
MR
Marginalcost
Efficientscale
P
Quantityproduced
Quantity produced =Efficient scale
Homework
Multiple Choice – 4, 8, 9, 10, 11, 12
Short Answer - 22
Product Differentiation
Differentiation by Style or Type Think pizza!!
Deep-dish crust v. thin crust v. stuffed crust
Consumers have different tastes Producers able to increase profits by differentiating
their product.
Product Differentiation
Differentiation by Location Nearer to you is better than farther away.
You may be willing to pay more when it’s closer/more convenient to/for you.
Product Differentiation
Differentiation by Quality Mercedes v. Kia
Prices higher for Mercedes due to perceived/actual quality difference.
Advertising
Advertising delivers two different messages: Information
persuasive
Advertising
Informative Store hours
What we sell
Extra services
Advertising
Persuasive ‘yummiest French fries’
‘Just do it!’
‘this house is charming and located in a lovely neighborhood.’
Use of humor, celebrities, special effects and/or musical jingles.
Brand Names
Brand Names are … Owned by particular companies
Used to differentiate products in consumer’s minds
We think Kleenex for facial tissue. Many other brands of facial tissue. Name brand v. store brand.
Ingredients essentially the same
Name brand cost more.
Homework
Multiple Choice – 13 - 19
Short Answer – 23, 24
Monopolistic Competition: Between Perfect Competition and Monopoly
