Monopolistic Competition - Economics - Lecture Slides, Slides of Economics

Download Monopolistic Competition - Economics - Lecture Slides and more Slides Economics in PDF only on Docsity! Monopolistic Competition docsity.com Definition Monopolistic Competition  Many firms selling products that are similar but not identical. Markets that have some features of competition and some features of monopoly. docsity.com Attribute 2  Product Differentiation Each firm produces a product that is at least slightly different from those of other firms. Rather than being a price taker, each firm faces a downward-sloping demand curve. docsity.com Attribute 3  Free Entry or Exit  Firms can enter or exit the market without restriction.  The number of firms in the market adjusts until economic profits are zero. docsity.com Short-Run Economic Profits  The Monopolistically Competitive Firm in the Short Run Short-run economic profits encourage new firms to enter the market. This:  Increases the number of products offered.  Reduces demand faced by firms already in the market.  Incumbent firms’ demand curves shift to the left.  Demand for the incumbent firms’ products fall, and their profits decline. docsity.com Copyright©2003 Southwestern/Thomson Learning Demand Quantity0 Price Price Loss- minimizing quantity Average total cost (b) Firm Makes Losses MR Losses ATC MC docsity.com Long-Run Equilibrium  Firms will enter and exit until the firms are making exactly zero economic profits. docsity.com Copyright©2003 Southwestern/Thomson Learning Quantity Price 0 Demand MR ATC MC Profit-maximizing quantity P = ATC docsity.com Excess Capacity  Excess Capacity There is no excess capacity in perfect competition in the long run. 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.  In monopolistic competition, output is less than the efficient scale of perfect competition. docsity.com Copyright©2003 Southwestern/Thomson Learning Quantity0 Price Demand (a) Monopolistically Competitive Firm Quantity0 Price P = MC P = MR (demand curve) (b) Perfectly Competitive Firm MC ATC MC ATC MR Efficient scale P Quantity produced Quantity produced = Efficient scale docsity.com Markup  Markup Over Marginal Cost For a competitive firm, price equals marginal cost. For a monopolistically competitive firm, price exceeds marginal cost. Because price exceeds marginal cost, an extra unit sold at the posted price means more profit for the monopolistically competitive firm. docsity.com Monopolistic Competition and Welfare of Society  Monopolistic competition does not have all the desirable properties of perfect competition.  There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost. docsity.com Monopolistic Competition and Welfare of Society  However, the administrative burden of regulating the pricing of all firms that produce differentiated products would be overwhelming.  Another way in which monopolistic competition may be socially inefficient is that the number of firms in the market may not be the “ideal” one. There may be too much or too little entry. docsity.com Advertising  When firms Sell differentiated products At price above marginal cost  Then, they have incentive to advertise To attract more buyers 22 docsity.com Advertising  Advertising as a signal of quality  Advertising – little apparent information Real information offered – a signal  Willingness to spend large amount of money  = signal about quality of the product Content of advertising = irrelevant 25 docsity.com Advertising  Brand names  Firm – brand name Spend more on advertising Charge higher prices Than generic substitutes  Critics of brand names Products – not differentiated Irrationality: consumers are willing to pay more for brand names 26 docsity.com Advertising  Brand names  Defenders of brand names Useful: high quality  Consumers – information about quality  Firms – incentive to maintain high quality 27 docsity.com