MONOPOLISTIC COMPETITIONPowerPoint PresentationSOME EXAMPLESSlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 11Slide 13Monopolistic competition slide 1MONOPOLISTIC COMPETITIONA market form in which there is:1) Product differentiation.2) Many firms.3) Easy entry and exit.Monopolistic competition slide 2The importance of monopolistic competition is that it seems to explain aspects of many important real world markets.Monopolistic competition slide 3SOME EXAMPLESShoe storesPizza parlorsFast food, in generalLocal moving companiesHand calculatorsPC compatible clonesOthers you can think of ...Monopolistic competition slide 4The 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.$/QDQGreasy Sam’s HamburgersMonopolistic competition slide 5$/QDQBecause the demand curve is negatively sloped marginal revenue must be less than average revenue.MRGreasy Sam’s HamburgersMonopolistic competition slide 6The 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 7$/QDQMRMCACWith the the cost curves shown below, the firm can maximize profits by choosing output where MC = MR.p*Q*Greasy Sam’s HamburgersMonopolistic competition slide 8$/QDQMRMCACProfits are shown by the shaded area.p*Q*Greasy Sam’s HamburgersMonopolistic competition slide 9$/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 11Do 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 13SUMMARY 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
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