Transcript Micro_Module 67-31

Module
Micro: 31
Econ: 67
Introduction to
Monopolistic Competition
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How prices and profits are determined in
monopolistic competition, both in the
short run and in the long run.
• How monopolistic competition can lead
to inefficiency and excess capacity.
Monopolistic Competition
• Characteristics in common with perfect comp.:
• Many firms exist in the market, but not as many as
perfect competition.
• There are no barriers to entry or exit.
• Characteristics in common with monopoly:
• The product is differentiated.
• Each firm has some ability to set the price of their
product.
Monopolistic Competition in
the Short Run
• In the short run,
monopolistic
competitors set price
and quantity in the
same way a monopoly
does.
• Monopolistic
competitors can earn a
profit in the short run.
Monopolistic Competition in
the Short Run
ATC
• Monopolistic
competitors can also
earn a loss in the
short run.
Monopolistic competition in
the Long Run
• Entry and exit occur in
response to short-run
profits or losses
• In the long run,
Monopolistic
competitors earn a
normal profit
Comparing Monopolistic Competition
with Perfect Competition
• Economic profit = 0 (normal profit), so ATC=P in
both due to entry and exit
• MR = MC in both (profit maximization rule)
• In perfect competition, ATC = P = MR = MC
• In monopolistic competition ATC = P > MR = MC
• Perfect competition achieves productive
efficiency by producing at the minimum ATC
• Monopolistic competition results in excess
capacity
Is Monopolistic Competition
Inefficient?
• Yes, P > MC so there is
DWL (deadweight loss)
• BUT, variety
(differentiated products)
provides a benefit to
consumers.
Figure 67.1 The Monopolistically Competitive Firm in the Short Run
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 67.2 Entry and Exit Shift Existing Firms’ Demand Curves and Marginal Revenue Curves
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 67.3 The Long-Run Zero-Profit Equilibrium
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 67.4 Comparing Long-Run Equilibrium in Perfect Competition and Monopolistic Competition
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers