SC ECON 221 - Monopolistic Competition (3 pages)

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Monopolistic Competition

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Monopolistic Competition


This lecture covers the concept of monopolistic competition. It also discusses examples of monopolistic competition, as well as short run and long run effects.

Lecture number:
Lecture Note
University Of South Carolina-Columbia
Econ 221 - Prin of Microeconomics
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ECON 221 Lecture 18 Outline of Last Lecture I Monopolies a General info b Natural Monopoly II Marginal Revenue III Profit Maximization IV Price Discrimination Outline of Current Lecture I Monopolistic Competition II Short Run effects III Long Run effects IV Efficiency and Implications Current Lecture Monopolistic Competition Lecture 19 Combines features of both monopolies and perfect competition o More competition than either PC or monopoly is monopolistic competition o Relatively large number of producers o Free entry and exit in the long run o Differentiated products Ex Coffee Shops in Columbia Many coffee shops within a particular city These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute No government or natural barriers to entry Each shop offers a slightly different differentiated product in terms of coffee environment etc o As a result coffee shops have some room to raise prices without losing all their customers Other examples gourmet burger restaurants vs fast food burgers any type of firm that aims to serve a local market differentiation by location Convenience Monopolistic Competition Features both monopoly and PC o A Mono Comp firm can be thought of as having a monopoly over their particular version of the good o Unlike monopoly there are close substitutes and free entry so Mono Comp firms face competition in the long run like PC firms Short run identical to monopolies o Max profits at MR MC o Downward sloping MR o Positive profit possible as long as Demand curve crosses ATC at some point Gap between ATC and D profit Long run o If Mono Comp firms in an industry are generally profitable more will want to enter If all coffee shops in Columbia are doing well others may find it worthwhile to enter with their own style What Impact does this have If existing firms are profitable in the short run new firms will enter reducing demand from existing firms o Continues until profits are 0 If existing firms are unprofitable firms exit increasing demand Continues until profits are 0 Implications and efficiency Both Mono Comp and PC firms earn 0 profit in the long run due to competition But in PC firms are all producing at lowest cost minimum of ATC whereas in MC firms are producing at higher costs referred to as excess capacity Due to excess capacity Mono Comp is in one sense less efficient than PC Any ways more efficient Efficiency requires that we consider how well off everyone is MC offers a major benefit to consumers that s difficult to quantify o Preference for variety Perf Comp Monopoly Mono Comp of sellers Many One Large Number Identical Products Yes No close substitutes irrelevant No slight differentiation Long run outcome for firms Zero profits firms enter shifting market supply up reducing price Positive profit Zero profit firms enter shifting firm demand down reducing price at Q Long run outcome for society Efficient Inefficient Deadweight loss Ambiguous

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