Transcript MONOPOLISTIC Competition

Monopolistic Competition
Chapter 17
Pages 373-386
4 Market Structures
Number of Firms
Many Firms
Type of Products
One
Firm
Monopoly
P > MC
• Tap water
• Electricity
Few
Firms
Oligopoly
P > MC
• Wireless
• Automobiles
• Airlines
Differentiated
products
Monopolistic
Competition
P > MC
• Hair Salons
• Restaurants
• Coffee Shops
Identical
products
Perfect
Competition
P = MC
• Wheat market:
(closest to theory)
Monopolistic Competition
Most common market structure in USA:
coffee shops, restaurants, hair salon, auto repair, etc…
Market Characteristics:
•
•
•
•
•
Many Sellers
Differentiated Products [not identical, but similar]
Relatively Easy to enter/exit industry (most important characteristic!)
Reasonably complete information
Some price control
Monopolistic Competition
• Firms produces a product that is slightly differentiated
• Firms face a downward-sloping demand curve
– therefore, P > MR
• Short Run: Economic Profit or Loss can exist
• Long Run: economic profit must = ZERO
– Due to easy entry/exit & large number of firms
Monopolistic Competition
Short Run Equilibrium
Price
MC
Firm can earn profit
in SHORT RUN
ATC
E1
P
ATC
D
MR
0
Q
Quantity
Short Run Profit Will Not Last
• Profit encourages new firms to enter the market
Price
New firms entering leads to:
Firm Makes Profit in SHORT RUN
ATC
1) Demand Curve shifts left
–
MC
As your firm sells less!
2) Profit Declines
3) Entry stops when profit = zero
Price
Average
total cost
Demand
MR
0
Profitmaximizing
quantity
Quantity
Monopolistic Competition
Long Run Equilibrium
Price
MC
Remember:
New entry shifted
The demand curve left
ATC
The demand curve is
now tangent to the
ATC curve
P = ATC
And this tangency lies
vertically above the
intersection of MR and MC
Economic Profit = ZERO
D
MR
0
Profit-maximizing
quantity
Quantity
Worksheet
• Monopolistic Competition
Long Run Equilibrium
Monopolistically Competitive Firm
Price
Perfectly Competitive Firm
Price
MC
MC
ATC
ATC
P
P
MR
0
Q
Efficient
Scale
D = MR
Demand
Quantity
0
Q = Efficient scale
Qty
Excess capacity - Gap between efficient scale production & qty produced