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Mic 11 Mic 11 Presentation Transcript

  • Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 1
  • CHAPTER11 Monopolistic Competition Microeconomics All Rights Reserved © Oxford University Press Malaysia, 2008 11– 2
  • DEFINITION OF MONOPOLISTIC COMPETITION Definition It is a market structure in which there are large numbers of small sellers selling differentiated products. These Product are close substitute and firms have easy entry and exit from the market.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 3
  • CHARACTERISTICS OF MONOPOLISTIC COMPETITION Characteristics • Large number of buyers and sellers: Each firm produces different or unique products, so they have some control over the prices and follows an independent price-output policy. • Differentiated products: Product differentiation could be through packaging, design, labelling, advertising and brand name.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 4
  • CHARACTERISTICS OFMONOPOLISTIC COMPETITION (CON’T) • Free of entry and exit into the market: Not as easy as perfect competition because of the existence of product differentiation. • Role of non-price competition is significant: Various methods used to attract the customers to buy a particular brand. • Selling cost: Different types of expenditure on advertisement would incur additional cost.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 5
  • TOTAL REVENUE – TOTAL COST APPROACH (1) (2) (3) (4) 5) Using Table: Total Quantity Price Total Cost Profit Profit maximization is (Q) (P) Revenue (TC) (TR-TC) (TR) determined by scanning through the 0 340 0 200 -200 profit at each level, 1 340 340 400 -60 and the level which 2 330 660 560 100 gives the highest profit 3 320 960 700 260 is the profit maximizing output. 4 310 1240 800 440 5 300 1500 900 600 6 290 1740 1040 700 7 280 1960 1200 760 8 270 2160 1400 760 9 260 2340 1800 540 10 240 2400 2400 0Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 6
  • TOTAL REVENUE –TOTAL COST APPROACH (CON’T) TR, TC Using Graph: TC TR curve is increasing TR and after the profit maximizing output, the curve starts to decline. Maximum profit is Highest vertical where the vertical difference difference between TR and TC is the highest. QuantityMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 7
  • MARGINAL REVENUE – MARGINAL COST APPROACH Quantity Price Marginal Marginal (Q) (P) Revenue Cost (MR) (MC) 0 340 Using Table: 1 340 340 200 The profit maximizing 2 160 output level is obtained 330 320 following the 3 320 300 140 MR = MC rule. 4 310 280 100 5 300 260 100 6 290 240 140 7 280 220 160 8 270 200 200 9 260 180 400 10 240 60 600Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 8
  • MARGINAL REVENUE – MARGINAL COST APPROACH (CON’T) MR, MC MC Using Graph: MR curve under imperfect market is downward sloping as the P* output increases. The profit maximization level occurs, MR = MC, where AR=P the MC curve intersect with the MR curve. MR Quantity Q*Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 9
  • PROFIT MAXIMIZATION USING THE EQUATION METHOD The demand function for a monopolistic competitive firm is given as P= 2000 – 1.5Q and MC is constant at RM800 per unit. Calculate profit maximizing price and quantity.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 10
  • PROFIT MAXIMIZATION USING THE EQUATION METHOD (CON’T) Solution For profit maximization to take place, we use the MR = MC rule. Firstly, we need to derive the demand curve. Given P = 2000 − 1.5Q MR = 2000 − 3Q MR = MC 2000 − 3Q = 800 3Q = 1200 Q = 400Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 11
  • PROFIT MAXIMIZATION USING THE EQUATION METHOD (CON’T) • Substitute Q = 400 into P = 2000 − 1.5Q P = 2000 − 600 P = 1400Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 12
  • PROFIT MAXIMIZATION IN THE SHORT RUN Monopolistic competitive firm economic profit The profit maximization level occurs Price (RM) MC where MR curve and MC curve intersect at point A. ATC To find the price, we use the same vertical line with output up to the demand curve. The profit maximizing P* AC PROFIT price and output are P* and Q*. A At output Q, the firm earns economic DD = AR profit or supernormal profit equal to the area Shaded. MR Economic profit or supernormal profit Quantity is the profit earned by a monopolist Q* when TR>TC.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 13
  • PROFIT MAXIMIZATION IN THE SHORT RUN (CON’T) Monopolistic competitive firm at breakeven Price (RM) MC ATC The profit maximization level occurs where MR curve and MC curve intersect at point A.AC/P* The profit maximizing price and output are P* and Q*. A DD = AR At output, Q monopolist is at the breakeven or earns normal profit. MR Economic profit or supernormal profit is the profit earned by a Q* Quantity monopolist when TR>TC.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 14
  • PROFIT MAXIMIZATION IN THE SHORT RUN (CON’T) Monopoly competitive firm suffers economic losses Price (RM) MC ATC The profit maximization level occurs where MR curve and MC curve intersect at point A. AC The profit maximizing price and LOSSES output are P* and Q*. P* At output, Q monopolist suffers A economic losses or subnormal DD = AR profit equal to the area shaded. MR Economic losses or subnormal profit is the loss incurred by a Quantity Q* monopolist when TR<TC.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 15
  • PROFIT MAXIMIZATION IN THE LONG RUN Monopoly competitive firm earns normal profit in long run Price (RM) LRMC LRATC A monopolistic competitive firm earns normal profit in the long run due free entry and exit. P* A DD = LRAR LRMR Quantity Q*Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 11– 16