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
FOUR MARKET MODELS 1 Monopolistic Competition 2 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? 3 Firms in a colluding oligopoly act as a monopoly and share the profit P MC ATC D MR Q 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 P will increase only a little P1 Pe P2 Q1 Qe Q2 D Q 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 Q D Q 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 7 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? 8 Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly 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) 9 Perfect Competition • • • • • Monopolistic Competition Oligopoly Pure Monopoly 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? 10 EXAMPLES 11 Examples 1. 2. 3. 4. 5. 6. 7. 8. Fast Food Restaurants Furniture companies Jewelry stores Salons and Barbers Clothing Stores Iphone/Android Apps Household Supplies Toiletries and Cosmetics 12 “Monopoly” + ”Competition” Monopolistic Qualities • Control over price of own good due to differentiated product • Demand greater than Marginal Revenue • Advertising to increase demand 13 “Monopoly” + ”Competition” Perfect Competition Qualities • Large number of smaller firms • Relatively easy entry and exit 14 “Monopoly” + ”Competition” 15 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? 16 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 17 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 18 Drawing Monopolistic Competition 19 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 Denter, driving down the DEMAND for firms already in the market. MR Q1 Q 20 Firms enter so demand falls until there is no economic profit P MC ATC P1 D MR Q1 Q 21 Firms enter so demand falls until there is no economic profit Price and quantity falls and TR=TC P MC ATC PLR D MR QLR Q 22 LONG-RUN EQUILIBRIUM Quantity where MR =MC up to Price = ATC P MC ATC PLR D MR QLR Q 23 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. 24 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, D driving up the DEMAND for firms already in the market. MR Q1 Q 25 Firms leave so demand increases until there is no economic profit ATC P MC P1 D MR Q1 Q 26 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 Are Monopolistically Competitive Firms Efficient? 28 Efficiency Refresher • 1) When is a market allocatively efficient? • 2) When is a market productively efficient? 29 LONG-RUN EQUILIBRIUM Not Allocatively Efficient because P MC Not Productively Efficient because not producing at Minimum ATC P MC ATC PLR D MR QLR QSocially Optimal Q 30 LONG-RUN EQUILIBRIUM This firm also has EXCESS CAPACITY P MC ATC PLR D MR QLR QSocially Optimal Q 31 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 32 LONG-RUN EQUILIBRIUM The firm can produce at a lower cost but it holds back production to maximize profit P MC ATC PLR D Excess Capacity MR QLR QProd Efficient Q 33 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. 34 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. 35 Graphing 1. 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. 2. Show shifts that will occur in the longrun and identify TR, TC, and profit. 36 “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 37 “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 38