Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
1 Economics 6th edition Chapter 13 1 Copyright © 2017 Pearson Education, Inc. All Rights Reserved Monopolistic Competition: The Competitive Model in a More Realistic Setting 2 Chapter Outline 13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market 13.2 How a Monopolistically Competitive Firm Maximizes Profit in the Short Run 13.3 What Happens to Profits in the Long Run? 13.4 Comparing Monopolistic Competition and Perfect Competition 13.5 How Marketing Differentiates Products 13.6 What Makes a Firm Successful? Copyright © 2017 Pearson Education, Inc. All Rights Reserved 3 Perfect Competition vs. Monopolistic Competition The perfectly competitive markets in the previous chapter had the following three features: 1. Many firms 2. Firms sell identical products 3. No barriers to entry to new firms entering the industry The first two features implied a horizontal demand curve for individual firms, while the third implied zero long-run profit. Monopolistically competitive firms share features #1 and #3, but their products are not identical to their competitors’. So we expect monopolistically competitive firms to have zero longrun profit but not to face a horizontal demand curve. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 4 Key Definitions Explicit vs. Implicit Cost Explicit Cost: A cost that involves spending money. Implicit Cost: A nonmonetary opportunity cost. Examples? Copyright © 2017 Pearson Education, Inc. All Rights Reserved 5 Key Definitions Profit = Total revenue (TR) – total cost (TC) = (Price – ATC) * Q Accounting Profit vs. Economic Profit Accounting Profit: A firm’s net income, measured as revenue minus operating expenses and taxes paid (i.e., explicit costs) Economic Profit: A firm’s revenues minus all of its implicit and explicit costs. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 6 Key Definitions Accounting Profit: A firm’s net income, measured as revenue minus operating expenses and taxes paid (i.e., explicit costs) Economic Profit: A firm’s revenues minus all of its implicit and explicit costs. A company has $150,000 in revenues and $100,000 in explicit costs and $25,000 in implicit costs. What are its: Accounting profits? Economic profits? $50,000 $25,000 Copyright © 2017 Pearson Education, Inc. All Rights Reserved 7 13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves. Monopolistic competition is a market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products. The key feature here is that the products that monopolistically competitive firms sell are differentiated from one another in some way. Example: Chipotle sells burritos and competes in the burrito market against other firms selling burritos; but its burritos are not identical to its competitors’. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 8 Figure 13.1 The Downward-Sloping Demand Curve for Burritos at Chipotle Chipotle sells burritos; while other firms also sell burritos, some customers have a preference for Chipotle’s burritos. So if Chipotle raises its price, some but not all of its customers will switch to buying their burritos elsewhere. This means Chipotle faces a downwardsloping demand curve. If Chipotle were in a perfectly competitive mkt, what would happen if raised prices? Copyright © 2017 Pearson Education, Inc. All Rights Reserved Table 13.1 Demand and Marginal Revenue at a Chipotle Burritos Sold per Week (Q) 0 1 2 3 4 5 6 7 8 9 10 11 Price (P) $10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 Total Revenue 𝑇𝑅 = 𝑃 × 𝑄 $0.00 9.50 18.00 25.50 32.00 37.50 42.00 45.50 48.00 49.50 50.00 49.50 Average Revenue 𝑇𝑅 𝐴𝑅 = 𝑄 Marginal Revenue 𝛥𝑇𝑅 𝑀𝑅 = 𝛥𝑄 — $9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 — $9.50 8.50 7.50 6.50 5.50 4.50 3.50 2.50 1.50 0.50 −0.50 Total revenue increases initially, then decreases; Chipotle has to lower the price in order to sell additional burritos. So marginal revenue is initially positive, then negative. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 9 Figure 13.2 How a Price Cut Affects a Firm’s Revenue (1 of 2) When Chipotle reduces the price of a burrito, it sells (let’s say) 1 more burrito. Its revenue increases because of the extra sale; this is the output effect of the price reduction. But its revenue decreases also; to sell another burrito, it reduces the price on all burritos. It loses $0.50 in revenue on each of the burritos it would have already sold at $7.50. This is the price effect of the price reduction. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 10 Figure 13.2 How a Price Cut Affects a Firm’s Revenue (2 of 2) Chipotle’s marginal revenue for selling the extra burrito is equal to the green area minus the pink area: the output effect minus the price effect. MR = $7 - $2.50 = $4.50 The output effect is equal to the price ($7); so marginal revenue is lower than the price. For any firm with a downwardsloping demand curve, its marginal revenue curve must be below its demand curve. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 11 Figure 13.3 The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm After the tenth burrito, reducing the price in order to increase sales results in revenue decreasing (negative marginal revenue). The price effect becomes larger than the output effect. Rev. from selling 1 more burrito < loss from receiving lower price on all burritos sold Copyright © 2017 Pearson Education, Inc. All Rights Reserved 12 General point for Monopolistically Competitive Firms: Every firm that has the ability to affect the price of the good it sells will have a marginal revenue curve below its demand curve Demand = MR (Perfectly Competitive) Copyright © 2017 Pearson Education, Inc. All Rights Reserved 13 14 One reason why the "fast-casual" restaurant market is competitive is that A) demand for "fast -casual" food is very high. B) it is trendy and therefore is likely to have a customer following. C) barriers to entry are low. D) consumption takes place in public. C The reason that the "fast-casual" restaurant market is monopolistically competitive rather than perfectly competitive is because A) barriers to entry are very low. B) there are many firms in the market. C) products are differentiated. D) entry into the market is blocked. Copyright © 2017 Pearson Education, Inc. All Rights Reserved C Quantity 1 2 3 4 5 6 Price (dollars) $7.50 7.00 6.50 6.00 5.50 5.00 What is the marginal revenue of the 3rd unit? A) $6.50 B) $5.50 C) $1.83 D) $0.50 B Copyright © 2017 Pearson Education, Inc. All Rights Reserved Total Revenue (dollars) $7.50 14.00 19.50 24.00 27.50 30.00 15 Quantity 1 2 3 4 5 6 Price (dollars) $7.50 7.00 6.50 6.00 5.50 5.00 The Table shows A) an elastic segment of the demand schedule. B) an inelastic segment of the demand schedule. C) a demand schedule with an elastic segment from $7.50 to $6.50 followed by an inelastic segment. D) a demand schedule with an inelastic segment from $7.50 to $6.50 followed by an elastic segment. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 16 Total Revenue (dollars) $7.50 14.00 19.50 24.00 27.50 30.00 A Quantity 1 2 3 4 5 6 Price (dollars) $7.50 7.00 6.50 6.00 5.50 5.00 Total Revenue (dollars) $7.50 14.00 19.50 24.00 27.50 30.00 What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price effect? A) output effect = $24.00; price effect = $19.50 B) output effect = $6.50; price effect = $2.00 C) output effect = -$0.50; price effect = $5.00 D) output effect = $6.00; price effect = -$1.50 D Copyright © 2017 Pearson Education, Inc. All Rights Reserved 17 18 13.2 How a Monopolistically Competitive Firm Maximizes Profit in the Short Run Explain how a monopolistically competitive firm maximizes profit in the short run. Just like a perfectly competitive firm, a monopolistically competitive firm should not simply try to maximize revenue. • Each additional unit of output incurs some marginal cost. • Profit maximization requires producing until the marginal revenue from the last unit is just equal to the marginal cost: MC = MR. • This same rule holds for all firms that can marginally adjust their output. Short run – means that not enough time for new firms to enter the market Copyright © 2017 Pearson Education, Inc. All Rights Reserved Figure 13.4 Maximizing Profit in a Monopolistically Competitive Market (Next 3 Slides) 19 Burritos Sold per Week (Q) Price (P) 0 $10.00 $0.00 — $6.00 — — –$6.00 1 9.50 9.50 $9.50 11.00 $5.00 $11.00 –1.50 2 9.00 18.00 8.50 15.50 4.50 7.75 2.50 3 8.50 25.50 7.50 19.50 4.00 6.50 6.00 4 8.00 32.00 6.50 24.50 5.00 6.13 7.50 5 7.50 37.50 5.50 30.00 5.50 6.00 7.50 6 7.00 42.00 4.50 36.00 6.00 6.00 6.00 7 6.50 45.50 3.50 42.50 6.50 6.07 3.00 8 6.00 48.00 2.50 49.50 7.00 6.19 –1.50 9 5.50 49.50 1.50 57.00 7.50 6.33 –7.50 10 5.00 50.00 0.50 65.00 8.00 6.50 –15.00 11 4.50 49.50 –0.50 73.50 8.50 6.68 –24.00 Total Marginal Revenue Revenue (TR) (MR) Total Cost (TC) Copyright © 2017 Pearson Education, Inc. All Rights Reserved Marginal Average Cost Total Cost (MC) (ATC) Profit 20 Chipotle sells burritos up until MC = MR. This selects the profit-maximizing quantity. Then the demand curve shows the price, and the ATC curve shows the average cost. Since Profit = (P – ATC) x Q, we can show profit on the graph with the green rectangle. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 21 To identify profit: 1. Use MC=MR to identify the profitmaximizing quantity. 2. Draw a vertical line at that quantity. 3. The vertical line will hit the demand curve: this is the price. 4. The vertical line will also hit the ATC curve: this is the average cost. 5. The difference between price and average cost is the profit (or loss) per unit. 6. Show the profit or loss with the rectangle with height (P – ATC) and length (Q* – 0), where Q* is the optimal quantity. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 22 What is the profit-maximizing rule for a monopolistically competitive firm? A) to produce a quantity that maximizes market share B) to produce a quantity that maximizes total revenue C) to produce a quantity such that marginal revenue equals marginal cost D) to produce a quantity such that price equals marginal cost C Copyright © 2017 Pearson Education, Inc. All Rights Reserved 23 13.3 What Happens to Profits in the Long Run? Analyze the situation of a monopolistically competitive firm in the long run. When a firm has total revenue greater than total cost, it makes an economic profit. • This economic profit gives entrepreneurs an incentive to enter the market. In our previous example, Chipotle makes an economic profit. • We expect new firms to enter the burrito market over long run. • These new firms will reduce the demand for Chipotle’s burritos. Copyright © 2017 Pearson Education, Inc. All Rights Reserved Figure 13.5 How Entry of New Firms Eliminates Profits At first (left panel), Chipotle has few competitors, so demand for its burritos is high. It makes an economic profit. This economic profit attracts new firms, decreasing the demand for Chipotle’s burritos (right panel). This continues until Chipotle no longer makes an economic profit. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 24 Table 13.2 The Short Run and the Long Run for a Monopolistically Competitive Firm (1 of 3) In the short run, a monopolistically competitive firm might make a profit or a loss. The situation where the firm is making a profit is above. Notice that there are quantities for which demand (price) is above ATC; this is what allows the firm to make a profit. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 25 Table 13.2 The Short Run and the Long Run for a Monopolistically Competitive Firm (2 of 3) Now the firm is making a loss. Notice that there is now no quantity for which demand (price) is above ATC; this firm must make a (short-run) economic loss, no matter what quantity it chooses. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 26 Table 13.2 The Short Run and the Long Run for a Monopolistically Competitive Firm (3 of 3) 27 In the long run, the firm must break even. Notice that the ATC curve is just tangent to the demand curve. The best the firm can do is to produce Q. There is no quantity at which the firm can make a profit; the ATC curve is never below the demand curve. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 28 Zero Profit in the Long Run? Our model of monopolistic competition predicts that firms will earn zero profit in the long run. However firms need not passively accept this long-run outcome. They could: • Innovate so that their costs are lower than other firms, or • Convince their customers that their product/experience is better than that of other firms, either by actually making it better in some unique way or making customers perceive that it is better, perhaps through advertising. Think of the long-run as “the direction of trend”; demand will continue to fall to the zero (economic) profit level, unless the firm is able to do something about it. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 29 Making the Connection: How Can Chipotle Maintain Its Economic Profit? One of Chipotle’s early marketing strategies was to convince people it was healthier than alternative fast foods. • But some reports have suggested this is not the case. To maintain its edge, Chipotle has tried to appear more socially responsible. • It announced it would stop using genetically modified ingredients and publicized buying many local ingredients. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 30 In the long run, if price is less than average cost A) there is an incentive for firms to exit the market. B) there is profit incentive for firms to enter the market. C) the market must be in long-run equilibrium. D) there is no incentive for the number of firms in the market to change. Copyright © 2017 Pearson Education, Inc. All Rights Reserved A 31 A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except A) new rivals entering the market. B) a decrease in demand for its product. C) demand for the firm's product becomes more elastic. D) a decrease in the number of rival products. Copyright © 2017 Pearson Education, Inc. All Rights Reserved D 32 What is the monopolistic competitor's profit maximizing output? A) Q1 units B) Q2 units C) Q3 units D) Q4 units B Copyright © 2017 Pearson Education, Inc. All Rights Reserved What is the monopolistic competitor's profit maximizing price? A) P1 B) P2 C) P3 D) P4 D Copyright © 2017 Pearson Education, Inc. All Rights Reserved 33 34 The firm represented in the diagram A) should exit the industry. B) makes zero accounting profit. C) makes zero economic profit. D) should expand its output to take advantage of economies of scale. C Copyright © 2017 Pearson Education, Inc. All Rights Reserved 35 13.4 Comparing Monopolistic Competition and Perfect Competition Compare the efficiency of monopolistic competition and perfect competition. Last chapter we learned that perfectly competitive firms achieved two types of economic efficiency. • Productive efficiency refers to producing items at the lowest possible cost. (minimum pt of ATC curve) • Allocative efficiency refers to producing all goods up to the point where the marginal benefit to consumers is just equal to the marginal cost to firms. [MC = MB (demand curve)] Monopolistic competition results in neither productive nor allocative efficiency. Copyright © 2017 Pearson Education, Inc. All Rights Reserved Figure 13.6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition (1 of 2) In panel (a), a perfectly competitive firm in long-run equilibrium produces at QPC, where price equals marginal cost and average total cost is at a minimum. The perfectly competitive firm is both allocatively efficient and productively efficient. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 36 Figure 13.6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition (2 of 2) Monopolistically competitive firms in panel (b) produce the quantity where MC=MR. The marginal benefit to consumers is given by the demand curve, so MC≠MB: not allocatively efficient. And average cost is above its minimum point: not productively efficient. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 37 38 Is Monopolistic Competition Bad for Consumers? The lack of efficiency suggests that monopolistic competition is a bad situation for consumers. • But consumers might benefit from the product differentiation. Example: If you were buying a car, would you prefer one a. Produced and sold at the lowest possible cost but not wellsuited to your tastes and preferences; or b. Produced and sold at a higher cost but designed to attract you to purchasing it? Many consumers are willing to accept a higher price for a differentiated product. So monopolistic competition is not necessarily bad for consumers. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 39 Making the Connection: Are All Cupcakes the Same? In 2002, Mia Bauer opened a gourmet cupcake store, Crumbs Bake Shop. • She sold gourmet cupcakes and was initially very profitable, expanding to 63 stores in 10 states. But her brand was insufficient to keep competitors out of the market, and in July 2014 Crumbs declared bankruptcy. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 40 What is the productively efficient output for the firm represented in the diagram? A) Q1 units B) Q2 units C) Q3 units D) Q4 units D Copyright © 2017 Pearson Education, Inc. All Rights Reserved 41 What is the allocatively efficient output for the firm represented in the diagram? A) Q1 units B) Q2 units C) Q3 units D) Q4 units C Copyright © 2017 Pearson Education, Inc. All Rights Reserved What is the amount42 of excess capacity? A) Q4 - Q3 units B) Q4 - Q2 units C) Q3 - Q2 units D) Q3 - Q1 units B Copyright © 2017 Pearson Education, Inc. All Rights Reserved 43 13.5 How Marketing Differentiates Products Define marketing and explain how firms use marketing to differentiate their products. Making customers believe that your product is worthwhile and different from those of other firms is not a trivial exercise. It typically involves some degree of marketing. Marketing: All the activities necessary for a firm to sell a product to a consumer. Once a firm manages to differentiate its product, it must continue to do so or risk heading toward the long-run outcome of zero economic profit. The process of doing this is known as brand management. Brand management: The actions of a firm intended to maintain the differentiation of a product over time. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 44 Advertising Advertising is a critical element of marketing for monopolistically competitive firms. • By advertising effectively, firms can increase demand for their products. But they can also use advertising to differentiate their products: effectively making the demand curve more inelastic. • This allows firms to charge a higher price and earn more shortrun profit. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 45 Defending a Brand Name Marketing experts and psychologists agree: a critical aspect of marketing is creating a brand name for your product. • A successful brand name can help to maintain product differentiation and delay the ability of other firms to compete away your profits. But firms must always try to maintain the perception of their product as better than others, making sure that, for example: • A highly-successful name like Coke, Xerox, or Band-Aid is uniquely associated to that product and not to generic products, • Other firms don’t illegally use their brand name, and • Franchisees and others legally allowed to use their brand name maintain the level of quality and service you expect. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 46 13.6 What Makes a Firm Successful? Identify the key factors that determine a firm’s success. A firm’s ability to differentiate its product and to produce it at a lower average cost than competing firms creates value for its customers. • Some factors that affect a firm’s profitability are not directly under the firm’s control. Certain factors will affect all the firms in a market. • The factors under a firm’s control—the ability to differentiate its product and the ability to produce it at lower cost—combine with the factors beyond its control to determine the firm’s profitability. Copyright © 2017 Pearson Education, Inc. All Rights Reserved 47 Figure 13.7 What Makes a Firm Successful? Copyright © 2017 Pearson Education, Inc. All Rights Reserved 48 Making the Connection: Is Being the First Firm in a Market a Key to Success? By being the first to sell a particular good, a firm may gain a first-mover advantage, finding its name closely associated with the good in the public’s mind. Surprisingly, recent research has shown that the first firm to enter a market often does not have a long-lived advantage over later entrants. Among dominant, but not first brands: • Bic pens • Apple iPod digital music player • Hewlett Packard laser printers In the end, providing customers with good products at a low price is probably the best way to ensure success. Copyright © 2017 Pearson Education, Inc. All Rights Reserved