Monopolistic Competition Chapter 17 Monopolistic Competition Characteristics Many

Monopolistic Competition Chapter 17

Monopolistic Competition Characteristics • • • Many Sellers Differentiated Products [not identical, but similar] Relatively Easy to enter or leave industry Reasonably complete information Some price control

4 Market Structures Number of Firms? Many firms Type of Products? One firm Monopoly • Tap water • Electricity Few firms Oligopoly • Soft Drinks • Automobiles Differentiated products Monopolistic Competition • Shoes • Restaurants Identical products Perfect Competition • Wheat •

Monopolistic Competition • Firms produces a product that is slightly differentiated • Firms face a downward-sloping demand curve – therefore, P > MR • Short Run: Economic Profit will exist • Long Run: Easy entry/exit ensures profit will = ZERO

Monopolistic Competition Profit in Short Run Price MC Firm makes profit in SHORT RUN ATC Price Average total cost Demand MR 0 Profitmaximizing quantity Quantity

Short Run Profit Affect • Short-run economic profits encourage new firms to enter the market New firms entering leads to: 1) Demand Curve shifts left 2) Profit Declines 3) Entry stops when profits = 0

Monopolistic Competitor in Long Run 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 MR 0 Profit-maximizing quantity Demand Quantity

Monopolistic Competition vs. Perfect Competition LONG RUN EQUILIBRIUM Monopolistically Competitive Firm Price MC MC ATC P P = MC MR 0 Perfectly Competitive Firm Quantity produced Efficient Scale ATC P = MR (demand curve) Demand Quantity 0 Quantity produced = Efficient scale -any production below efficient scale Quantity

Perfect Competition vs. Monopolistic Competition • • PERFECT COMPETITION: Profit in short run, zero L. R. Many Firms No excess capacity in long run Production at minimum of ATC – Production efficiency • • MONOPOLISTIC COMPETITION: Profit in short run, zero L. R. Many Firms Excess capacity in long run Production above minimum of ATC – No production efficiency • Price = MC (allocatively efficient) • No deadweight Loss • No incentive to advertise • Price > MC • Some deadweight Loss • Incentive to advertise Advertising will affect demand