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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
CHAPTER
12
Monopolistic
Competition: The
Competitive Model
in a More Realistic
Setting
The coffeehouse market is
competitive because it is
inexpensive to open a new
store. Hundreds of firms in
the United States operate
coffeehouses.
Prepared by:
Fernando Quijano
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Economics · R. Glenn Hubbard, Anthony Patrick O’Brien, 3e.
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CHAPTER
12
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Chapter Outline and
Learning Objectives
Monopolistic
Competition: The
Competitive Model
in a More Realistic
Setting
12.1. Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
Explain why a monopolistically competitive firm has
downward-sloping demand and marginal revenue curves.
12.2
How a Monopolistically Competitive Firm
Maximizes Profit in the Short Run
Explain how a monopolistically competitive
firm maximizes profit in the short run.
12.3
What Happens to Profits in the Long Run?
Analyze the situation of a monopolistically competitive firm
in the long run.
12.4
Comparing Perfect Competition and Monopolistic
Competition
Compare the efficiency of monopolistic competition and
perfect competition.
12.5
How Marketing Differentiates Products
Define marketing and explain
how firms use it to differentiate their products.
12.6
What Makes a Firm Successful?
Identify the key factors that determine a firm’s success.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Monopolistic Competition:
The Competitive Model in a More Realistic Setting
Monopolistic competition
A market structure in which barriers
to entry are low and many firms
compete by selling similar, but not
identical, products.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
12.1 LEARNING OBJECTIVE
Explain why a monopolistically
competitive firm has downward-sloping
demand and marginal revenue curves.
The Demand Curve for a Monopolistically Competitive Firm
FIGURE 12-1
The Downward-Sloping
Demand for Caffè Lattes at
a Starbucks
If a Starbucks increases the price
of caffè lattes, it will lose some,
but not all, of its customers.
In this case, raising the price from
$3.00 to $3.25 reduces the
quantity of caffè lattes sold from
3,000 to 2,400.
Therefore, unlike a perfect
competitor, a Starbucks store
faces a downward-sloping
demand curve.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
12.1 LEARNING OBJECTIVE
Explain why a monopolistically
competitive firm has downward-sloping
demand and marginal revenue curves.
Marginal Revenue for a Firm with a Downward-Sloping
Demand Curve
Table 12-1
Demand and Marginal Revenue
at a Starbucks
CAFFÈ LATTES SOLD
PER WEEK (Q)
PRICE (P)
TOTAL
REVENUE
(TR = P x Q)
0
1
2
3
4
5
6
7
8
9
10
$6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
$0.00
5.50
10.00
13.50
16.00
17.50
18.00
17.50
16.00
13.50
10.00
AVERAGE
REVENUE
(AR = TR/Q)
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
―
$5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
―
$5.50
4.50
3.50
2.50
1.50
0.50
–0.50
–1.50
–2.50
–3.50
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
12.1 LEARNING OBJECTIVE
Explain why a monopolistically
competitive firm has downward-sloping
demand and marginal revenue curves.
Marginal Revenue for a Firm with a Downward-Sloping
Demand Curve
FIGURE 12-2
How a Price Cut Affects
a Firm’s Revenue
If the local Starbucks reduces
the price of a caffè latte from
$3.50 to $3.00, the number of
caffè lattes it sells per week will
increase from 5 to 6.
Its marginal revenue from
selling the sixth caffè latte will
be $0.50, which is equal to the
$3.00 additional revenue from
selling 1 more caffè latte (the
area of the green box)
minus the $2.50 loss in
revenue from selling the first 5
caffè lattes for $0.50 less each
(the area of the red box).
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
12.1 LEARNING OBJECTIVE
Explain why a monopolistically
competitive firm has downward-sloping
demand and marginal revenue curves.
Marginal Revenue for a Firm with a Downward-Sloping
Demand Curve
FIGURE 12-3
The Demand and Marginal
Revenue Curves for a
Monopolistically
Competitive Firm
Any firm that has the ability to affect
the price of the product it sells will
have a marginal revenue curve that
is below its demand curve.
We plot the data from Table 12-1 to
create the demand and marginal
revenue curves.
After the sixth caffè latte, marginal
revenue becomes negative
because the additional revenue
received from selling 1 more caffè
latte is smaller than the revenue lost
from receiving a lower price on the
caffè lattes that could have been
sold at the original price.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
How a Monopolistically Competitive
Firm Maximizes Profit in the Short Run
12.2 LEARNING OBJECTIVE
Explain how a monopolistically competitive
firm maximizes profit in the short run.
FIGURE 12-4
Maximizing Profit in a
Monopolistically
Competitive Market
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12.2 LEARNING OBJECTIVE
Solved Problem 12-2
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Does Minimizing Cost Maximize
Profits?
Will Apple maximize profits if it produces
800,000 iPhones per month?
Explain how a monopolistically competitive
firm maximizes profit in the short run.
Average cost reaches a minimum at a
quantity of 800,000, but profits are
maximized at a quantity of 600,000.
YOUR TURN: For more practice, do related problem 2.6 at the end of this
chapter.
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12.3 LEARNING OBJECTIVE
What Happens to Profits in the Long Run?
Analyze the situation of a monopolistically
competitive firm in the long run.
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
How Does the Entry of New Firms Affect the Profits of Existing Firms?
FIGURE 12-5
How Entry of New Firms Eliminates Profits
Panel (a) shows that in the short run Starbucks can charge a price above average total cost (point A) and make a
profit, shown by the green rectangle. But this profit attracts new firms to enter the market, which shifts the demand and
marginal revenue curves to the curves labeled “Long run” in panel (b). At point B, Starbucks breaks even.
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12.3 LEARNING OBJECTIVE
What Happens to Profits in the Long Run?
Analyze the situation of a monopolistically
competitive firm in the long run.
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
How Does the Entry of New Firms Affect the Profits of Existing Firms?
Table 12-2
The Short Run and the
Long Run for a
Monopolistically
Competitive Firm
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12.3 LEARNING OBJECTIVE
Analyze the situation of a monopolistically
competitive firm in the long run.
Making
the The Rise and Decline of Starbucks
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Connection
In a monopolistically
competitive industry,
maintaining profits in the
long run is very difficult.
Starbucks: No longer different enough?
YOUR TURN: Test your understanding by doing related problem 3.6 at the end of
this chapter.
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12.3 LEARNING OBJECTIVE
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
What Happens to Profits in the Long Run?
Analyze the situation of a monopolistically
competitive firm in the long run.
Is Zero Economic Profit Inevitable in the Long Run?
A firm’s profits will be eliminated in
the long run only if a firm stands still
and fails to find new ways of
differentiating its product or fails to
find new ways of lowering the cost
of producing its product.
Don’t Let This Happen to YOU!
Don’t Confuse Zero Economic Profit with Zero Accounting Profit
YOUR TURN: Test your understanding by doing related problem 3.4 at the end of
this chapter.
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12.3 LEARNING OBJECTIVE
Solved Problem 12-3
Analyze the situation of a monopolistically
competitive firm in the long run.
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Can It Be Profitable to Be
the High-Price Seller?
Because the greater demand more than offsets the higher costs, the hhgregg store makes a
larger profit.
YOUR TURN: For more practice, do related problem 3.7 at the end of this
chapter.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Comparing Perfect Competition
and Monopolistic Competition
12.4 LEARNING OBJECTIVE
Compare the efficiency of monopolistic
competition and perfect competition.
Monopolistic competition and perfect competition share the
characteristic that in long-run equilibrium, firms earn zero
economic profits.
However, there are two important differences between longrun equilibrium in the two markets:
• Monopolistically competitive firms charge a price
greater than marginal cost.
• Monopolistically competitive firms do not produce at
minimum average total cost.
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Comparing Perfect Competition
and Monopolistic Competition
12.4 LEARNING OBJECTIVE
Compare the efficiency of monopolistic
competition and perfect competition.
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Excess Capacity under Monopolistic Competition
FIGURE 12-6
Comparing Long-Run Equilibrium under Perfect
Competition and Monopolistic Competition
A monopolistically competitive firm has excess capacity: If it increased its output, it could
produce at a lower average cost.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Comparing Perfect Competition
and Monopolistic Competition
12.4 LEARNING OBJECTIVE
Compare the efficiency of monopolistic
competition and perfect competition.
Is Monopolistic Competition Inefficient?
Economists have debated whether monopolistically
competitive markets being neither productively nor
allocatively efficient results in a significant loss of
well-being to society in these markets compared with
perfectly competitive markets.
How Consumers Benefit from Monopolistic Competition
Consumers benefit from being able to purchase a
product that is differentiated and more closely suited
to their tastes.
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12.4 LEARNING OBJECTIVE
Making
the
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Connection
Abercrombie & Fitch: Can the
Product Be Too Differentiated?
Compare the efficiency of monopolistic
competition and perfect competition.
A firm whose strategy of
product differentiation
succeeds will experience
increases in same-store
sales.
Did Abercrombie and Fitch narrow its target
market too much?
YOUR TURN: Test your understanding by doing related problem 4.6 at the end of
this chapter.
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12.5 LEARNING OBJECTIVE
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
How Marketing Differentiates Products
Define marketing and explain
how firms use it to differentiate their
products.
Marketing All the activities
necessary for a firm to sell a
product to a consumer.
Brand Management
Brand management The
actions of a firm intended to
maintain the differentiation of
a product over time.
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12.5 LEARNING OBJECTIVE
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
How Marketing Differentiates Products
Define marketing and explain
how firms use it to differentiate their
products.
Advertising
If the increase in revenue that results from the
advertising is greater than the increase in costs, the
firm’s profits will rise.
Defending a Brand Name
A firm can apply for a trademark, which grants legal
protection against other firms using its product’s
name.
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Making Google Tries (and Fails) to
the
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Connection
Measure the Effectiveness
of Radio Advertising
12.5 LEARNING OBJECTIVE
Define marketing and explain
how firms use it to differentiate their
products.
A firm’s optimal level of
advertising occurs where the
marginal cost of advertising
equals the marginal revenue
earned from advertising.
Does spending on radio
advertising attract customers?
YOUR TURN: Test your understanding by doing related problem 5.7 at the end of
this chapter.
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12.6 LEARNING OBJECTIVE
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
What Makes a Firm Successful?
Identify the key factors that
determine a firm’s success.
FIGURE 12-7
What Makes a Firm Successful?
The factors under a firm’s control—the
ability to differentiate its product and the
ability to produce it at lower cost—
combine with the factors beyond its
control to determine the firm’s
profitability.
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12.6 LEARNING OBJECTIVE
Making
the
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
Connection
Is Being the First Firm in
the Market a Key to Success?
Identify the key factors that
determine a firm’s success.
The firms that were first to introduce a
product ultimately lost out to latecomers
who did a better job of providing consumers
with products that were more reliable, less
expensive, more convenient, or otherwise
provided greater value.
Although not first to market, Bic
ultimately was more successful
than the firm that pioneered
ballpoint pens.
YOUR TURN: Test your understanding by doing related problem 6.6 at the end of
this chapter.
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AN INSIDE
LOOK
>> Starbucks Faces
Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
McCompetition
The effect of entry on price, quantity, and profits at Starbucks.
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Chapter 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
KEY TERMS
Brand management
Marketing
Monopolistic competition
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