Transcript Monopolistic-Competition

Monopolistic Competition
• A market with many buyers and sellers, with low
barriers to entry and differentiated products
• Each seller creates a certain uniqueness and
brand loyalty within a largely competitive market
• Each seller can charge a slightly different price
(Perfect competition assumes homogeneity of products.
Monopolistic Competition is a more likely model under which
most business operate, particularly manufactured goods.)
Monopolistic Competition
– The Curves in the Long Run!
Price £
MC
AC
P profit max
MR
Q
profit max
AR = D
Quantity
Profit maximising output is where MC = MR
Price for this output is set by the demand / AR curve
This diagram shows no abnormal profit since AC = P
Short Run
Long Run
Price £
Price £
MC
MC AC
AC
AC
P profit max
P
MR
Q
profit max
AR = D
MR
AR = D
Q
Quantity
profit max
Quantity
In the short run, firms may make a loss (AC > AR) so firms
will leave the industry.
This reduces the advertising costs (AC) and increases the
market size (AR) of existing firms to return to normal profits
Short Run
Long Run
Price £
Price £
MC
MC
AC
AC
P profit max
P
AC
MR
Q
profit max
AR = D
Quantity
MR
AR = D
Q
profit max
Quantity
In the short run, firms are may make supernormal profits (AC
< AR) so new firms will enter the industry.
This increases advertising costs (AC) and decreases market
size (AR) of existing firms to return to normal profits.
Monopolistic Competition Efficiency
Allocative
Efficiency

Since P ≠ MC; (P>MC)
Productive
Efficiency

Q is not at min AC.
Evaluating the Monopolistic
Competition Model
• Model assumes freedom of entry/exit – the
extent of this may differ by industry
• New products may mimic some existing
products more than others – so some
firms may be squeezed out while others
maintain super-normal profits