MONOPOLISTIC COMPETITION

A market form in which there is: 1) Product differentiation. 2) Many firms. 3) Easy entry and exit.

Monopolistic competition

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The importance of monopolistic competition is that it seems to explain aspects of many important real world markets.

Monopolistic competition

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SOME EXAMPLES
Shoe stores Pizza parlors Fast food, in general Local moving companies Hand calculators PC compatible clones Others you can think of ...

Monopolistic competition

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The demand curve facing a monopolistically competitive firm looks very much like that facing a monopoly, but it is very elastic due to the presence of many close substitutes.
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Monopolistic competition slide 4

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Because the demand curve is negatively sloped marginal revenue must be less than average revenue.

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Monopolistic competition

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The short-run analysis of the monopolistically competitive firm proceeds exactly as for monopoly, because in the short-run entry and exit are not possible.

Monopolistic competition

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With the the cost curves shown below, the firm can maximize profits by choosing output where MC = MR. $/Q MC AC

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Monopolistic competition

MR
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Profits are shown by the shaded area. MC AC

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Monopolistic competition

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What happens in the long-run, as firms can enter or leave? The following hidden slide shows the process. MC AC

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Monopolistic competition

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Hidden slide

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If existing firms can earn profits, So in the long-run the equilibrium of there is an incentive for new firms to the firm in monopolistic competition enter. The process of entryAs new firms enter, the demand will continue will look like this. until the incentive tocurve for this firm shifts down. enter goes $/Q away. That is, profit must be zero. AC MC

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Monopolistic competition

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Do monopolistically competitive firms operate in society¶s interest? Do they produce outputs and sell at prices which maximize surplus? Are the firms economically efficient?

Monopolistic competition

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Generally ³no,´ because price will be greater than marginal cost. But because the demand curve is likely to be very elastic, the difference between P and MC may not be very great.

Monopolistic competition

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SUMMARY OF MONOPOLISTIC COMPETITION
1) In the short-run firms choose price and output by setting MC = MR. 2) In the long-run entry of new firms assures that profit will be zero. 3) Some economic inefficiency exists because in equilibrium price is higher than marginal cost.

Monopolistic competition

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