MicroeconomicsMONOPOLISTIC COMPETITIONPowerPoint PresentationSOME EXAMPLESSlide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 12Slide 14Comparison of market structureMicroeconomicsMonopolistic Competition© 1999 Michigan State University.All rights reserved.Monopolistic competition slide 2MONOPOLISTIC COMPETITIONA market form in which there is:1) Product differentiation.2) Many firms.3) Easy entry and exit.Monopolistic competition slide 3The importance of monopolistic competition is that it seems to explain aspects of many important real world markets.Monopolistic competition slide 4SOME EXAMPLESShoe storesPizza parlorsFast food, in generalLocal moving companiesHand calculatorsPC compatible clonesOthers you can think of ...Monopolistic competition slide 5The demand curve facing a monopolistically competitive firm looks very much like that facing a monopoly, but it is very elastic due to the presence of many close substitutes.$/QDQGreasy Sam’s HamburgersMonopolistic competition slide 6$/QDQBecause the demand curve is negatively sloped marginal revenue must be less than average revenue.MRGreasy Sam’s HamburgersMonopolistic competition slide 7The short-run analysis of the monopolistically competitive firm proceeds exactly as for monopoly, because in the short-run entry and exit are not possible.Monopolistic competition slide 8$/QDQMRMCACWith the the cost curves shown below, the firm can maximize profits by choosing output where MC = MR.p*Q*Greasy Sam’s HamburgersMonopolistic competition slide 9$/QDQMRMCACProfits are shown by the shaded area.p*Q*Greasy Sam’s HamburgersMonopolistic competition slide 10$/QDQMRMCACp*Q*Greasy Sam’s HamburgersWhat happens in the long-run, as firms can enter or leave?The following hidden slide shows the process.Hidden slideMonopolistic competition slide 12Do monopolistically competitive firms operate in society’s interest? Do they produce outputs and sell at prices which maximize surplus? Are the firms economically efficient?Monopolistic competition slide 14SUMMARY OF MONOPOLISTIC COMPETITION1) In the short-run firms choose price and output by setting MC = MR.2) In the long-run entry of new firms assures that profit will be zero.3) Some economic inefficiency exists because in equilibrium price is higher than marginal cost.Monopolistic competition slide 15Comparison of market structurePerfect competitionMonopolistic competitionOligopoly MonopolyEconomic efficiencyP = MC P > MC P > MC P >MCCost Efficient scaleBelow eff. scaleNot likely efficient scaleNot likely efficient scaleEconomic profit0 0 Likely > 0 Likely >
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