Transcript 2 reviews - David E. Harrington

Chinese
Food
Funeral
Services
Monopolistic Competition
Characteristics of Monopolistic Competition
1. Many sellers
2. Product differentiation
3. Free entry and exit
The Market for Chinese Food in NYC
1. Many sellers: Citysearch lists 1,832
Chinese restaurants in NYC
2. Product differentiation: For people
who want it…
spicy
Kosher
fast
bland
3. Free entry and exit: restaurants are
constantly opening and closing.
Cost Rating→$
$ (under $20)
$$ ($21-$30)
$$$ ($31-$40)
$$$$ (above $40)
Source: CitySearch
(21 reviews)
(9 reviews)
(1 reviews)
(7 reviews)
(2 reviews)
Source: CitySearch
Differentiated Products
Each Chinese restaurant produces meals that are slightly different
from those of other Chinese restaurants.
Rather than being a price taker, each Chinese restaurant faces a
downward-sloping demand curve.
Free Entry or Exit
Firms can enter or exit the market without restriction.
The number of firms in the market adjusts until economic
profits are zero.
Price
($ per meal)
MC
D
0
100
200
300
400
500
600
700
Chinese Meals (number per week)
800
900
1000
MC
P=ATC
ATC
D
MR
0
100
200
300
400
500
600
700
Qπ
Chinese Meals (number per week)
800
900
1000
Over the last few years, a large number of Chinese from
Fujian Province have been smuggled into New York City.
Their “desperation” makes “them highly desirable as
laborers” (NYTimes, 7/22/2001). Indeed, signs litter the
windows of Chinese restaurants advertising jobs for “hardworking Fujianese,” including the front window of the Silk
Road Palace.
MC2
Total Revenue = A+B
Total Cost = B
Econ Profits = A
P2
ATC(Qπ2)
A
ATC2
B
D
MR
0
100
200
300
400
500
600
700
Qπ2
Chinese Meals (number per week)
800
900
1000
Short-run economic profits encourage new
Chinese Restaurants to enter the market.
This:
• Increases the variety in Chinese meals.
• Reduces demand faced by restaurants already in
the market.
• Incumbent restaurants’ demand curves shift to the
left.
• Demand for the incumbent restaurants’ meals fall,
and their profits decline.
The Long-Run Equilibrium
• Chinese restaurants will enter and exit until
the firms are making exactly zero economic
profits.
MC2
The demand
curve is tangent
to the ATC curve.
P3= ATC
ATC2
And this tangency
lies vertically above
the intersection of
MR and MC.
MR3
0
100
200
300
400
500
D3
600
700
Qπ3
Chinese Meals (number per week)
800
900
1000
Monopolistic versus Perfect
Competition
• There are two noteworthy differences
between monopolistic and perfect
competition:
– Excess capacity
– Markup over marginal cost
MC2
The demand
curve is tangent
to the ATC curve.
P3= ATC
ATC2
And this tangency
lies vertically above
the intersection of
MR and MC.
MR3
0
100
200
300
400
500
D3
600
700
Qπ3
Chinese Meals (number per week)
800
900
1000
Monopolistic versus Perfect
Competition
• Excess Capacity
– Free entry results in competitive firms
producing at the point where average total cost
is minimized, which is the efficient scale of the
firm.
.
– In monopolistic competition, output is less than
the efficient scale of perfect competition.
Monopolistic versus Perfect
Competition
(a) Monopolistically Competitive Firm
Price
(b) Perfectly Competitive Firm
Price
MC
MC
ATC
ATC
P
P = MC
MR
0
Quantity
produced
Efficient
scale
P = MR
(demand
curve)
Demand
Quantity
0
Quantity produced =
Efficient scale
Quantity
Monopolistic versus Perfect
Competition
• Markup over Marginal Cost
– For a competitive firm, price equals marginal
cost.
– For a monopolistically competitive firm, price
exceeds marginal cost.
Monopolistic versus Perfect
Competition
(a) Monopolistically Competitive Firm
Price
(b) Perfectly Competitive Firm
Price
MC
MC
ATC
ATC
Markup
P
P = MC
P = MR
(demand
curve)
Marginal
cost
MR
0
Quantity
produced
Demand
Quantity
0
Quantity produced
Quantity
Monopolistic Competition
and the Welfare of Society
• There is the normal deadweight loss of
monopoly pricing in monopolistic
competition caused by the markup of price
over marginal cost.
• However, it may be that people are willing
to incur the cost to have the greater variety
offered by monopolistically competitive
markets.