monopolistic competition sfls online

I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) MonopolyFour Market TypesMarket Structure

II.) Monopolistic competitionMarket StructureEasy to enter/exit marketCompetitiveGoods are differentNot very efficient allocation

Market StructurePerfect CompetitionPure MonopolyMonopolistic CompetitionOligopolyDuopolyMonopoly

*

Between Monopoly and PC CompetitionTwo extremesI.) Perfect competition: many firms, identical productsIV.) Monopoly: one firmIn between these extremes: imperfect competitionIII.) Oligopoly: only a few sellers offer similar or identical products. II.) Monopolistic competition: many firms sell similar but not identical products. 0

**In the preceding two chapters, we studied the two extremes of the competition spectrum. This chapter focuses on monopolistic competition, one of the market structures in between the two extremes.

Examples of each market type:

Perfect competition: wheat, milk

Monopoly: tap water, cable TV

Oligopoly: tennis balls, cigarettes

Monopolistic competition: novels, movies

Many(a few price makers)ImperfectsubstitutesWeak barriers to enter/ exitP > MRP > MC

P = ATC zero econ profits in LR

Characteristics Perfect CompetitionMonopolistic CompetitionOligopolyMonopoly# of sellersMany (price takers)One (no substitutes)Substitution of Product sold Only one product type from all sellersNo SubstitutesBarriers to entry into marketNo barriers to enter/ exitAlmost impossible for others to enter the marketPricing vs MC and MRP =MC=MRP > MRP > MCEfficiently Efficient with zero econ profit P = ATC P > ATCBig LR profits

When the price of one firms product rises, the quantity demanded of that firms product decreases. (normal looking demand curve)II.) Monopolistic CompetitionProduct differentiationFour items that are the key to this market structure: Slightly different from competing firms, but it may have close substitutes

*Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space.

II.) Monopolistic CompetitionProduct differentiationFour items that are the key to this market structure: Even though firms are selling different products there is still highly competitive forces on firms and the decisions they make.Many firms with weak barriers to entryLater this plays into the debate over advertising


Short Run Firm behavior is very similar to monopoly but with competitionIf profits in the short run: New firms enter market, taking some demand away from existing firms, prices and profits fall.

If losses in the short run:Some firms exit the market,remaining firms enjoy higher demand and prices.II.) Monopolistic CompetitionFour items that are the key to this market structure:


Similar to perfect competition.Long Run Entry and exit drive economic profit to zero.II.) Monopolistic CompetitionFour items that are the key to this market structure: Short Run Firm behavior is very similar to monopoly but with competition


(MR) Marginal RevenueProfit MaximizationProfit-Maximizing Output:level at which (MR) marginal revenue equals (MC) marginal cost MR = MCWe assume all firms are profit maximizing, producing at the point where their profits are at their highest(MC) Marginal Cost

Same answers as before

IV.) Monopoly DemandQP

****The important thing to understand is that when a monopoly wants to sell at a larger Q it must lower its price on every single unit made, including ones already made D = AR =PTo sell a larger Q, the firm must reduce P on all units. Thus, MR P.2040106Same as for Monopoly

IV.) Monopoly DemandQPTo sell a larger Q, the firm must reduce P on all units. Thus, MR P.And will always be,MR < PMRPrice:P = D = ARWhere average revenue meets the quantity producedMCD = AR =P

II.) Monopolistic Competition Short Run

QPD = ARMRMCPrice

P = D at MR = MCATC

Difference between AR and ATCProfit Amount

Q = ATCCost

MR is below D since have to reduce the price on every extra unit

Making an economic (abnormal) profit in the short runII.) Monopolistic Competition Short RunProfit-Maximizing Level

MR = MC

PQQMonopoly short run and long runPMonopolistic Competition in the short runA MC firm can make an economic (abnormal) profit in the short run- Output is not productively and not allocatively efficient However the big difference is that MC firms demand curves are usually much more elastic because of competitionDMRMCATCMCATCII.) Monopolistic Competition Short RunDMR

PQQMonopoly short run and long runPMonopolistic Competition in the short runA MC firm can make an economic (abnormal) profit in the short run- Output is not productively and not allocatively efficient However the big difference is that MC firms demand curves are usually much more elastic because of competitionDMRMCATCMCATCII.) Monopolistic Competition Short RunDMR

the big difference is that MC firms demand curves are usually much more elastic because of competition

QPD = ARMRMCProfit-Maximizing Level

MR = MCPrice

P = D at MR = MCATC

Difference between AR and ATCLoss Amount

Q = ATCCost

Making an economic loss in the short runII.) Monopolistic Competition Short RunMC short run losing money


MR = MCPrice

P = D at MR = MCATC


Q = ATCCost

Making an economic loss in the short runII.) Monopolistic Competition Short RunAVCThe same issue of shutting down in the short run if the price is below AVC just like with perfect competition.


MR = MCPrice

P = D at MR = MCATC


Q = ATCCost

Making an economic loss in the short runII.) Monopolistic Competition Short Run

***Run into the same issue of shutting down in the short run if the price is below AVC just like with perfect competition.AVC

Similar to perfect competition.Long Run Entry and exit drive economic profit to zero.II.) Monopolistic CompetitionFour items that are the key to this market structure: Short Run Firm behavior is very similar to monopoly but with competition


II.) Monopolistic Competition Long RunIn the long run a MC firm can only earn a normal profitIn the Long Run Since they are selling slightly different products, there are substitutions for their product if the price is too high and take away some of the firms demand for their good or service.The barriers to entry arent very high and if there are abnormal profits then other firms will enter the market and take away some of the firms demand for their G&S.Since there are many sellers, the firm cant have monopoly-like power and that takes away some of the firms demand for the good or service.So only a normal profit P = ATC

II.) Monopolistic Competition Long RunIn the long run a MC firm can only earn a normal profitIn the Long Run There are substitutions for their product if the price is too high. ( This can shift the demand for the firm) The barriers to entry arent very high. (This can shift the demand for the firm)Since there are many sellers. (This can shift the demand for the firm)So all they can do is make a normal profit means price will equal costs P = ATC


MR = MCPrice

P = D at MR = MCATC

Difference between AR and ATC = 0 (normal profit)Profit Amount

Q = ATCCost

*** In the long run the demand curve will be touching the ATC curve at one point on the downward sloping side and that it the long run equilibrium.

Making a normal profit in the long runII.) Monopolistic Competition Long Run

II.) From Short Run to Long Run

PQSDQMarket D + SPMC Firm short runMC Other firms notice that there are abnormal profits to be made and would also like to make those profits and so enter the market and shift the supply curve to the left which also decreases the demand for the individual firm and shifts their demand curve to the rightATCMRD

II.) From Short Run to Long Run

PQSDQMarket D + SPMC Firm Long Run EquilibriumMC Market supply increasesIndividual firm demand ( not market demand) decreases to point of making a normal profitATCMRD

S1MR1D1II.) From Short Run to Long Run

PQDQQ1P1Market D + SPMC Firm Long Run EquilibriumMC Market supply increasesIndividual firm demand ( not market demand) decreases to point of making a normal profitATCII.) Monopolistic Competition Long RunS1MR1D1

PQQMC firm Short Run EquilibriumPMC Firm Long Run EquilibriumMC ATCII.) Monopolistic Competition SR and LRMRDMC ATCMRD

Short run is like monopoly, long run is like perfect competition, except the Demand curve is tangent to the ATC curve but not at the lowest ATC point

II.) Monopolistic Competition Welfare Analysis

QPD = ARMRMCATC

Making a normal profit in the long runII.) Monopolistic Competition Welfare Analysis I will remove the ATC curve just to make this easier to read, to find allocative efficiency since it is not a main curve used to figure out surpluses, just know that it is there and makes this not all straight linesAllocative efficiencyMost desirable outcome from societys perspective

QPD = ARMRMC

Making a normal profit in the long runII.) Monopolistic Competition Welfare Analysis MC firm produces at profit maximizing point of MR = MCFor society Allocative efficiency isProfit-Maximizing

MR = MCSurplus-Maximizing

P = MCDeadweight loss to societyDifference of what production society wants but a monopolistic firm actually makes

QPD = ARMRMCATC

Making a normal profit in the long runII.) Monopolistic Competition Welfare Analysis Productive efficiencyProducing at the most efficient possible amountFor productive efficiency I have to leave in the ATC curve because productive efficiency is asking if the firm is producing the good or service at the most efficient point for the firm in regards to society.

QPD = ARMRMC

Making a normal profit in the long runII.) Monopolistic Competition Welfare Analysis MC firm produces at profit maximizing point of MR = MCProfit-Maximizing

MR = MCDeadweight loss to societyDifference of what production society wants but monopolistic firm actually makes

ATC***Technically there is no consumer surplus or producer surplus in the long run For society productive efficiency isSurplus-Maximizing

Q = min ATC

PQQQ1P1PLong Run Short Run MC ATCMRD

MC ATCMRD1Abnormal profit - YES

Productively - NOEfficient (Q = min ATC ) Allocatively - NOEfficient ( P = MR )Abnormal profit - NO

Productively - NOEfficient (Q = min ATC ) Allocatively - NOEfficient ( P = MR )

II.) Monopolistic Competition Welfare Analysis Why Monopolistic Competition Is Less Efficient than Perfect CompetitionExcess capacityMarkup over marginal costmonopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output.

Under perfect competition, firms produce the quantity that minimizes ATC.Under monopolistic competition, P > MC.

Under perfect competition, P = MC.

QPD = ARMRMC

Making a normal profit in the long runII.) Monopolistic Competition Welfare Analysis ATCExcess capacityoperates on the downward-sloping part of its ATC curveMarkupP > MC

Consumer and Producer surplus is very hard to measure but0II.) Monopolistic Competition Welfare Analysis Problems with Welfare Analysis:

*** The inefficiencies of monopolistic competition are subtle and hard to measure. No easy way for policymakers to improve the market outcome.Number of firms in the market may not be optimal, due to external effects from the entry of new firms: The product-variety externality

surplus consumers get from the introduction of new products.The business-stealing externalitylosses incurred by existing firms when new firms enter market.

**One of these externalities is positive, the other is negative. Its not clear which one is bigger, and it may in fact differ by industry.

0II.) Monopolistic Competition Welfare Analysis So far, we have studied three market structures: perfect competition, monopoly, and monopolistic competition. In each of these, would you expect to see firms spending money to advertise their products? Why or why not?

Is advertising good or bad from societys viewpoint? Try to think of at least one pro and con. Advertising


0II.) Monopolistic Competition Welfare Analysis So far, we have studied three market structures: perfect competition, monopoly, and monopolistic competition. In each of these, would you expect to see firms spending money to advertise their products? Why or why not?

Is advertising good or bad from societys viewpoint? Try to think of at least one pro and con. AdvertisingA point for later


II.) Monopolistic CompetitionA Summary

II.) Monopolistic CompetitionProduct differentiationSlightly different from competing firms, but it may have close substitutesEven though firms are selling different products there is still highly competitive forces on firms and the decisions they make.Many firms with weak barriers to entry


PQQQ1P1PLong Run Short Run MC ATCMRD

MC ATCMRD1Abnormal profit - YES

Productively - NOEfficient (Q = min ATC ) Allocatively - NOEfficient ( P = MC )Abnormal profit - NO

Productively - NOEfficient (Q = min ATC ) Allocatively - NOEfficient ( P = MC )

II.) Monopolistic Competition Welfare Analysis Why Monopolistic Competition Is Less Efficient than Perfect CompetitionExcess capacityMarkup over marginal costmonopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output.

Under perfect competition, firms produce the quantity that minimizes ATC.Under monopolistic competition, P > MC.

Under perfect competition, P = MC.

II.) Monopolistic CompetitionA SummaryA monopolistically competitive market has many firms, differentiated products, and free entry. Each firm in a monopolistically competitive market has excess capacity produces less than the quantity that minimizes ATC. Each firm charges a price above marginal cost.

II.) Monopolistic CompetitionA SummaryMonopolistic competition does not have all of the desirable welfare properties of perfect competition. There is a deadweight loss caused by the markup of price over marginal cost. Also, the number of firms (and thus varieties) can be too large or too small. There is no clear way for policymakers to improve the market outcome.

II.) Monopolistic CompetitionA Summary but a part not explained in this PPTProduct differentiation and markup pricing lead to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to reduce competition and take advantage of consumer irrationality. Defenders argue that firms use them to inform consumers and to compete more vigorously on price and product quality.

That it for now! Thank you!

*

**In the preceding two chapters, we studied the two extremes of the competition spectrum. This chapter focuses on monopolistic competition, one of the market structures in between the two extremes.

Examples of each market type:

Perfect competition: wheat, milk

Monopoly: tap water, cable TV

Oligopoly: tennis balls, cigarettes

Monopolistic competition: novels, movies

*Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space. *Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space. *Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space. *Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space.

*Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space. **One of these externalities is positive, the other is negative. Its not clear which one is bigger, and it may in fact differ by industry. **One of these externalities is positive, the other is negative. Its not clear which one is bigger, and it may in fact differ by industry. **One of these externalities is positive, the other is negative. Its not clear which one is bigger, and it may in fact differ by industry. *Product differentiation is the heart of the space between monopoly and competition. An old ice-cream on the beach analogy really nails down the idea of product differentiation and explains how monopolistic competition fills the space between monopoly and perfect competition. Draw a line on the blackboard and label the two ends A and B. Tell the students that the line represents a long beach along which beachgoers are uniformly spaced. An ice-cream vendor decides to set up shop on the beachthe only one. Where will she locate? The students will quickly see that the centermidway between A and B is the spot that will get most customers because the cost of an ice-cream is the market price plus the walking time to get it (remind them that the beach is very long!) Now a second ice-cream vendor opens up. Where does he locate? With a bit of help, the students will see that the best spot is right next to the first one. With one producer, there is monopoly and no varietyno product differentiation. With two producers, there is still no differentiation technically, there is minimum differentiation. Now suppose a third and fourth ice-cream vendor come along. Where do they locate? At the ends of the beach at A and B. They differentiate as much as possible from each other and from the first two. Further entry has new ice-cream vendors locating in the middle of the gaps between the existing ones, always going into the widest gap. If the market could stand the competition, eventually, there would be ice-cream vendors so close to each other all along the beach that the members of any adjacent group were indistinguishable to a customer. Product differentiation would have been pushed to the point that there is no space for additional variety and the market would look like perfect competition. Real products are like the beach example. Talk about sports shoes, breakfast cereals, and any other goods that interest you and for which there are good locally observable examples and encourage the students to see that they are like the beach example. The variety of products fill the available variety space.

monopolistic competition sfls online

Education