Micro Chapter 23 Presentation 1

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Micro Chapter 23 Presentation 1

• Monopolistic Competition

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Characteristics of Monopolistic Competition

• 1. Relatively large number of sellers- 25, 50 not
  hundreds or thousands
• 2. Differentiated Products-often by heavy
  advertising
• 3. Easy Entry/Exit from the industry

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Characteristics Continued

• 4. Small market share
• 5. No collusion (situation where firms act
  together in order to fix prices, divide a market,
  or otherwise restrict competition)
• 6. Independent Actions- each firm can determine
  its own pricing policy

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Examples of Monopolistic Competition

• In metropolitan areas Grocery Stores, gas
  stations, barbershops, dry cleaners, clothing
  stores, medical care, and real estate agencies

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Product Differentiation

• One firms product is distinguished from
  competing products by means of design, related
  services, quality, location or other attributes

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Product Differentiation Examples

• 1. Product Attributes- differences in functional
  features, materials, design and workmanship
• Ex- PCs with different memory, speed etc.
• Retail stores, furniture stores

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Product Differentiation Examples

• 2. Service- helpfulness of clerks, reputation,
  turnaround on delivery

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Product Differentiation Examples

• 3. Location- Convenient stores v. large grocery
  stores, Motels close to freeway exits

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Product Differentiation Examples

• 4. Brand Names and Packaging- Advil v. Generics
• Bottled water exclaiming Pure Spring H2O
• Use of celebrities to sell products

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Product Differentiation Examples

• 5. Advertising- to make price less of a factor in
  consumer purchases and make product differences a
  greater factor Nonprice Competition

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Product Differentiation Examples

• 6. Some control over prices- if consumers prefer
  a certain brand, within limits, they will
  purchase the preferred product

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Demand Curve

• Monopolistic Competition has a highly but not
  perfectly elastic demand curve
• Reasons
• 1. Few rivals
• 2. Products are differentiated so they are not
  perfect substitutes

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Profit

• In the long run, only a normal profit will be
  earned
• Normal profit- the payment made by a firm to
  obtain entrepreneurial ability (cost of doing
  business)

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When Profits Occur

• New firms enter the industry
• Demand faced by existing curves shifts to the
  left (falls) because of new substitutes and
  reduces economic profits

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Price and Output Determination
In Monopolistic Competition
Short-Run Profits
ATC
MC
P1
A1
Price and Costs
Economic Profit
D1
MR MC
MR
0
Q1
Quantity
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When Losses Occur

• With SR losses, some firms will exit
• With fewer substitutes, the existing firms will
  have demand curves shift to the right (up) and
  eventually they will earn normal profits

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Price and Output Determination
In Monopolistic Competition
Short-Run Losses
ATC
MC
A2
P2
Loss
Price and Costs
D2
MR MC
MR
0
Q2
Quantity
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Monopolistic Competition and Efficiency

• Recall PMCMinimum ATC

P4
Price is Higher
Excess Capacity at Minimum ATC
Q4
Monopolistic Competition is Not Efficient