Transcript Chapter 17 Lecture Notes (no voice)

Monopolistic
Competition
Chapter 17
[with marginalia]
g
m
The Four Types of Market Structure
Number of Firms?
Many
firms
One
firm
Few
firms
Monopoly
Oligopoly
• Tap water
• Cable TV
Type of Products?
Differentiated
products
Identical
products
Monopolistic
Competition
Perfect
Competition
• Tennis balls
• Novels
• Wheat
• Crude oil
• Movies
• Milk
Monopolistic Competition
o Markets that have some features of competition and some features of
monopoly.
o Attributes of Monopolistic Competition
o Many sellers
o There are many firms competing for the same group of customers.
o Product examples include books, CDs, movies, computer games,
restaurants, piano lessons, cookies, furniture, etc.
o Product differentiation
o Each firm produces a product that is at least slightly different from
those of other firms.
o Rather than being a price taker, each firm faces a downwardsloping demand curve.
o Free entry and exit
o Firms can enter or exit the market without restriction.
o The number of firms in the market adjusts until economic profits
are zero.
Monopolistic Competitors in the Short
Run...
(a) Firm Makes a Profit
Price
Price
Average
total cost
MC
ATC
Demand
Profit
MR
0
Profitmaximizing quantity
Quantity
Monopolistic Competitors in the Short
Run...
(b) Firm Makes Losses
Price
MC
ATC
Losses
Average
total cost
Price
Demand
MR
0
Lossminimizing
quantity
Quantity
Monopolistic Competition in the Short
Run
o Short-run economic profits encourage new firms
to enter the market. This:
o Increases the number of products offered.
o Reduces demand faced by firms already in the
market.
o Incumbent firms’ demand curves shift to the
left.
o Demand for the incumbent firms’ products fall,
and their profits decline.
Monopolistic Competition in the Short
Run II
o Short-run economic losses encourage firms to exit the
market. This:
o Decreases the number of products offered.
o Increases demand faced by the remaining firms.
o Shifts the remaining firms’ demand curves to the
right.
o Increases the remaining firms’ profits.
o The Long-Run Equilibrium
o Firms will enter and exit until the firms are making
exactly zero economic profits.
A Monopolistic Competitor in the Long Run...
Two Characteristics of LongRun Equilibrium
As in a monopoly, price
exceeds marginal cost.
Price
MC
ATC
Profit maximization
requires marginal
revenue to equal
marginal cost.
P=ATC
MR
0
Profit-maximizing
quantity
The downward-sloping
demand curve makes
marginal revenue less
than price.
Demand
Quantity
As in a competitive market,
price equals average total
cost. Free entry and exit
drive economic profit to zero.
Excess Capacity
o
o
o
There is no excess capacity in perfect competition
in the long run.
o Free entry results in competitive firms producing
at the point where average total cost is
minimized, which is the efficient scale of the firm.
There is excess capacity in monopolistic
competition in the long run.
o In monopolistic competition, output is less than
the efficient scale of perfect competition. For a
competitive firm, price equals marginal cost.
Therefore, monopolistic competition is “inefficient.”
Excess Capacity...
(a) Monopolistically Competitive Firm
Price
(b) Perfectly Competitive Firm
Price
MC
MC
ATC
P
P = MC
ATC
P = MR
(demand
curve)
Excess capacity
Demand
Quantity Efficient
produced scale
Quantity
Quantity= Efficient
produced scale
Quantity
Advertising
Monopolistic Competition is Characterized
by Advertising.
Is this good or bad?
Has the quality of Presidential Candidates
improved now that advertising is used?
Are resources allocated to advertising
wasted?