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Monopolistic Competition

Monopolistic Competition. Monopolistic Competition (m.c.). large number of independent sellers no or low barriers to entry differentiated product. differentiated products. products that are distinguished from similar products by such characteristics as quality, design, and location.

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Monopolistic Competition

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  1. Monopolistic Competition

  2. Monopolistic Competition (m.c.) • large number of independent sellers • no or low barriers to entry • differentiated product

  3. differentiated products products that are distinguished from similar products by such characteristics as quality, design, and location. examples: service stations, aspirin, tissues, retail stores

  4. Demand Curve for the Monopolistic Competitor’s Product Since the product is differentiated, there is some brand loyalty and the firm has some control over price. Since there are good substitutes available, however, the demand curve is fairly elastic.

  5. The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product. p.c. m.c. monopoly P P P D D D Q Q Q

  6. Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.

  7. Monopolistic Competitor making positive economic profits

  8. Profit-maximizing output: where MR = MC MC $ ATC MR D Q* quantity

  9. Determine the price from the demand curve, above Q*. MC $ ATC P* MR D Q* quantity

  10. Determine the cost per unit from the ATC curve, above Q*. MC $ ATC P* ATC* MR D Q* quantity

  11. Determine the TR = PQ box. MC $ ATC P* ATC* MR D Q* quantity

  12. Determine the TC = ATC . Q box. MC $ ATC P* ATC* MR D Q* quantity

  13. The difference between TR and TC is profit. MC $ ATC P* ATC* profit MR D Q* quantity

  14. Monopolistic Competitor with a loss

  15. Profit-maximizing or loss-minimizing output: where MR = MC ATC MC $ AVC MR D Q* quantity

  16. Determine the price from the demand curve, above Q* ATC MC $ AVC P* MR D Q* quantity

  17. Determine the cost per unit from the ATC curve, above Q* ATC MC $ AVC ATC* P* MR D Q* quantity

  18. Determine the TC = ATC . Q box ATC MC $ AVC ATC* P* MR D Q* quantity

  19. Determine the TR = PQ box. ATC MC $ AVC ATC* P* MR D Q* quantity

  20. The difference between TR and TC is profit or loss. ATC MC $ AVC ATC* P* loss MR D Q* quantity

  21. Monopolistic Competitor Breaking Even (Zero Economic Profit)

  22. Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC) MC $ ATC MR D Q* quantity

  23. Determine the price from the demand curve, above Q* MC $ ATC P* MR D Q* quantity

  24. Determine the cost per unit from the ATC curve, above Q* MC $ ATC ATC* = P* MR D Q* quantity

  25. Determine the TR = PQ box. MC $ ATC ATC* = P* MR D Q* quantity

  26. Determine the TC = ATC . Q box. MC $ ATC ATC* = P* MR D Q* quantity

  27. Since TR = TC, profit is zero. MC $ ATC ATC* = P* MR D Q* quantity

  28. Possibilities for the Monopolistic Competitor short run: positive profits, losses, or breaking even. long run: breaking even.

  29. Similarities between perfect competition and monopolistic competition • Profits must be zero in long run equilibrium. • Firms are responsive to changes in demand conditions. • Competition in the pursuit of profit encourages resource movements that are efficient.

  30. Differences between perfect competition and monopolistic competition • In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not. • For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC. • Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.

  31. Price Discrimination when a seller charges different prices to different consumers for the same product or service.

  32. Examples Charging different prices for movie admission to students and senior citizens and to other customers is price discrimination. Charging different prices for movie admission on a Wednesday afternoon and on a Saturday night is not price discrimination because the products are not the same.

  33. Requirements for Price Discrimination to Occur • Firm must have some control over price. (So perfect competitors can not price discriminate, but monopolistic competitors, monopolists, and oligopolists can.) • Firm must be able to separate consumers into different identifiable groups. • The different groups must have different elasticities.

  34. The price discriminating firm charges the group with the higher elasticity a lower price.

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