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FOUR MARKET MODELS

FOUR MARKET MODELS. Monopolistic Competition. Review Questions. 1) How do we treat colluding firms in a oligopoly (legally, graphically)? 2) Why does the graph for competing oligopolies have a Kinked Demand Curve? 3) What are the different ways a firm can differentiate it’s product?.

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FOUR MARKET MODELS

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  1. FOUR MARKET MODELS

  2. Monopolistic Competition

  3. Review Questions • 1) How do we treat colluding firms in a oligopoly (legally, graphically)? • 2) Why does the graph for competing oligopolies have a Kinked Demand Curve? • 3) What are the different ways a firm can differentiate it’s product?

  4. Firms in a colluding oligopoly act as a monopoly and share the profit P MC ATC D MR Q

  5. If this firm decreases it’s price, other firms will match it and lower their prices Since all firms have lower prices, Qd for this firm will increase only a little P Elastic P1 Pe P2 Inelastic D Q Q1 Qe Q2

  6. Where is Marginal Revenue? MR has a vertical gap at the kink. The result is that MC can move and Qe won’t change. Price is sticky. P MC Pe MR D Q Q

  7. Differentiated Products • Examples of NON-PRICE Competition • Brand Names and Packaging • Product Attributes • Service • Location • Advertising (Two Goals) • 1. Increase Demand • 2. Make demand more INELASTIC

  8. Review Questions • 1) How do we treat colluding firms in a oligopoly (legally, graphically)? • 2) Why does the graph for competing oligopolies have a Kinked Demand Curve? • 3) What are the different ways a firm can differentiate a product?

  9. Pure Monopoly Pure Monopoly Perfect Competition Monopolistic Competition Monopolistic Competition Oligopoly Oligopoly Characteristics of Monopolistic Competition: • Relatively Large Number of Sellers • Easy Entry and Exit (Low Barriers) • Some control over price • Differentiated Products • A lot of non-price competition (Advertising)

  10. Pure Monopoly Pure Monopoly Perfect Competition Monopolistic Competition Monopolistic Competition Oligopoly Oligopoly • Relatively Large Number of Sellers • Easy Entry and Exit (Low Barriers) • Some control over price • Differentiated Products • A lot of non-price competition (Advertising) • What industries/markets do you believe are monopolistically competitive?

  11. EXAMPLES

  12. Examples • Fast Food Restaurants • Furniture companies • Jewelry stores • Salons and Barbers • Clothing Stores • Iphone/Android Apps • Household Supplies • Toiletries and Cosmetics

  13. “Monopoly” + ”Competition” • Monopolistic Qualities • Control over price of own good due to differentiated product • Demand greater than Marginal Revenue • Advertising to increase demand

  14. “Monopoly” + ”Competition” • Perfect Competition Qualities • Large number of smaller firms • Relatively easy entry and exit

  15. “Monopoly” + ”Competition”

  16. Efficiency and Profitability • Based on the characteristics of monopoly and perfect competition that make up monopolistic competition answer the following questions: • 1) Are monopolistically competitively markets efficient? • 2) Can monopolistically competitively markets earn profits? • When? In the short run? In the long run?

  17. Efficiency and Profitability • Monopolistic competitive markets are inefficient. Why? • Cost of advertising/competition-raises price, lowers quantity • More quantity demanded than produced • Monopolistic competitive markets do not earn profits in long run. Why? • Free entry and exit

  18. Differentiated Products • Examples of NON-PRICE Competition • Brand Names and Packaging • Product Attributes • Service • Location • Advertising (Two Goals) • 1. Increase Demand • 2. Make demand more INELASTIC

  19. Drawing Monopolistic Competition

  20. Monopolistic Competition is made up of prices makers so MR is less than Demand In the short-run, it is the same graph as a monopoly making profit P MC ATC P1 In the long-run, new firms will enter, driving down the DEMAND for firms already in the market. D MR Q Q1 20

  21. Firms enter so demand falls until there is no economic profit P MC ATC P1 D MR Q Q1 21

  22. Firms enter so demand falls until there is no economic profit Price and quantity falls and TR=TC P MC ATC PLR D MR Q QLR 22

  23. LONG-RUN EQUILIBRIUM Quantity where MR =MC up to Price = ATC P MC ATC PLR D MR Q QLR 23

  24. Why does DEMAND shift? When short-run profits are made… • New firms enter. • New firms mean more close substitutes and less market shares for each existing firm. • Demand for each firm falls. When short-run losses are made… • Firms exit. • Result is less substitutes and more market shares for remaining firms. • Demand for each firm rises.

  25. What happens when there is a loss? In the short-run, the graph is the same as a monopoly making a loss ATC P MC P1 In the long-run, firms will leave, driving up the DEMAND for firms already in the market. D MR Q Q1 25

  26. Firms leave so demand increases until there is no economic profit ATC P MC P1 D MR Q Q1 26

  27. Firms leave so demand increases until there is no economic profit Price and quantity increase and TR=TC ATC P MC PLR D MR QLR Q 27

  28. Are Monopolistically Competitive Firms Efficient?

  29. Efficiency Refresher • 1) When is a market allocatively efficient? • 2) When is a market productively efficient?

  30. LONG-RUN EQUILIBRIUM Not Allocatively Efficient because P MC Not Productively Efficient because not producing at Minimum ATC P ATC MC PLR D MR Q QLR QSocially Optimal 30

  31. LONG-RUN EQUILIBRIUM This firm also has EXCESS CAPACITY P ATC MC PLR D MR Q QLR QSocially Optimal 31

  32. Excess Capacity • Given current resources, the firm can produce at the lowest costs (minimum ATC) but they decide not to. • The gap between the minimum ATC output and the profit maximizing output. • Ability to make more

  33. LONG-RUN EQUILIBRIUM The firm can produce at a lower cost but it holds back production to maximize profit P ATC MC PLR D Excess Capacity MR Q QLR QProd Efficient 33

  34. Practice Question Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would: A) have more economic profit. B) have a loss. C) also achieve allocative efficiency. D) be under producing. E) be in long-run equilibrium.

  35. Advantages of MONOPOLISTIC COMPETITION • Large amount of different products for consumers. • Branding and advertising can result in sustained profits for some firms. • Ex: Nike might continue to make above normal profit because they are a well known brand.

  36. Graphing Draw the graph for a monopolistic competitive fast food restaurant making $400 total profit by selling 200 burgers at $4 each. Label D, MR, MC, Price, and Quantity. Show shifts that will occur in the long-run and identify TR, TC, and profit.

  37. “Monopoly” + ”Competition” • Monopolistic Qualities • Control over price of own good due to differentiated product • D greater than MR • Plenty of Advertising • Not efficient- increased costs means increased price and lower quantity

  38. “Monopoly” + ”Competition” • Perfect Competition Qualities • Large number of smaller firms • Relatively easy entry and exit • Zero Economic Profit in Long-Run since firms can enter/exit if incentive exists

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