Monopolistic Competition
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Monopolistic Competition

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Managerial Economics in Global economy ...

Managerial Economics in Global economy

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  • 1. Monopolistic Competition MONOPOLISTIC COMPETITION
  • 2. The four types of market structure 2
  • 3. What Is Monopolistic Competition? Monopolistic competition is a market with the following characteristics:  A large number of firms.  Each firm produces a differentiated product.  Firms compete on product quality, price, and marketing.  Firms are free to enter and exit the industry.
  • 4. What Is Monopolistic Competition? Large Number of Firms The presence of a large number of firms in the market implies:  Each firm has only a small market share and therefore has limited market power to influence the price of its product.
  • 5. What Is Monopolistic Competition? Product Differentiation Firms in monopolistic competition practice product differentiation, which means that each firm makes a product that is slightly different from the products of competing firms.
  • 6. What Is Monopolistic Competition? Competing on Quality, Price, and Marketing Product differentiation enables firms to compete in three areas: quality, price, and marketing. Quality includes design, reliability, and service. Because firms produce differentiated products, each firm has a downward-sloping demand curve for its own product. But there is a tradeoff between price and quality. Differentiated products must be marketed using advertising and packaging.
  • 7. What Is Monopolistic Competition? Entry and Exit There are no barriers to entry in monopolistic competition, so firms cannot earn an economic profit in the long run.
  • 8. Price and Output in Monopolistic Competition The Firm’s Short-Run Output and Price Decision A firm that has decided the quality of its product and its marketing program produces the profit-maximizing quantity at which its marginal revenue equals its marginal cost (MR = MC). Price is set at the highest price the firm can charge for the profit-maximizing quantity. The price is determined from the demand curve for the firm’s product.
  • 9. Monopolistic competitors in the short run (a) Firm makes profit (b) Firm makes losses Price Price MC ATC Price MC ATC ATC Price ATC Profi t Demand Losse s Demand MR 0 Profitmaximizing quantity MR Quantity 0 Lossminimizing quantity Quantity Monopolistic competitors, like monopolists, maximize profit by producing the quantity at which marginal revenue equals marginal cost. The firm in panel (a) makes a profit because, at this quantity, price is above average total cost. The firm in panel (b) makes losses because, at this quantity, price is less than average total cost. 9
  • 10. Monopolistic competitors in the short run (a) Firm makes profit (b) Firm makes losses Price Price MC ATC Price MC ATC ATC Price ATC Profi t Demand Losse s Demand MR 0 Profitmaximizing quantity MR Quantity 0 Lossminimizing quantity Quantity Monopolistic competitors, like monopolists, maximize profit by producing the quantity at which marginal revenue equals marginal cost. The firm in panel (a) makes a profit because, at this quantity, price is above average total cost. The firm in panel (b) makes losses because, at this quantity, price is less than average total cost. 9