Download Monopolistic Competition

Monopolistic
Competition
1
Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Characteristics of Monopolistic
Competition:
• Relatively Large Number of Sellers
• Differentiated Products
• Some control over price
• Easy Entry and Exit (Low Barriers)
• A lot of non-price competition
(Advertising)
2
Examples:
1.
2.
3.
4.
5.
Fast Food Restaurants
Furniture companies
Jewelry stores
Hair Salons
Clothing Manufacturers
3
“Monopoly” + ”Competition”
Monopolistic Qualities
• Control over price of own good due
to differentiated product
• D greater than MR
• Plenty of Advertising
• Not efficient
Perfect Competition Qualities
• Large number of smaller firms
• Relatively easy entry and exit
• Zero Economic Profit in Long-Run
since firms can enter
4
Differentiated Products
• Goods are NOT identical.
• Firms seek to capture a piece of the
market by making unique goods.
• Since these products have substitutes,
firms use NON-PRICE Competition.
Examples of NON-PRICE Competition
• Brand Names and Packaging
• Product Attributes
• Service
• Location
• Advertising (Two Goals)
1. Increase Demand
2. Make demand more INELASTIC
5
Differentiated Products
6
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
P1
In the long-run, new firms will Denter,
driving down the DEMAND for firms
already in the market.
MR
Q1
Q
7
Firms enter so demand falls until there is no
economic profit
P
MC
P1
D
MR
Q1
Q
8
Firms enter so demand falls until there is no
economic profit
Price and quantity falls and TR=TC
P
MC
PLR
D
MR
QLR
Q
9
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.
10
Advantages of
MONOPOLISTIC COMPETITION
• Large number of firms and product
variation meets societies needs.
• Nonprice Competition (product
differentiation and advertising) may
result in sustained profits for some
firms.
Ex: Nike might continue to make above
normal profit because they are a well
known brand.
11
Final examination
• As part of the final examination each
student may submit one multiple choice
question for inclusion on the final exam.
• Requirements
– 4 Possible Answers (A-D)
– Must be about an economic principle learned in
class
• Questions will be accepted up until the start
of the period two classes from now.
12
Final examination
• This is optional
• Compensation is dependent on the total amount of
questions received.
• Example
– 1 Student turns in a question = 20 points to student
– 2 Students turn in questions= 18 points to each
– 3 =16 each, 4 = 14 etc.
– If 11 students turn in question no points awarded
– If no students turn in questions then all will get 5
extra credit points
13
Final examination
• At beginning of next class I will announce
how many questions have been submitted
• Although the submission time is the
beginning of class, if a student turns in a
question right at the last minute then the
class will have until the end of the period to
submit a question.
14