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6 monopolistic competition

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PCP SESSION 3 - 13 NOV 2011.
PREPARED BY NISHANT GARG

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6 monopolistic competition

  1. 1. Monopolistic Competition <ul><li>Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. </li></ul>
  2. 2. Monopolistic Competition <ul><li>Types of Imperfectly Competitive Markets </li></ul><ul><ul><li>Monopolistic Competition </li></ul></ul><ul><ul><ul><li>Many firms selling products that are similar but not identical. </li></ul></ul></ul><ul><ul><li>Oligopoly </li></ul></ul><ul><ul><ul><li>Only a few sellers, each offering a similar or identical product to the others. </li></ul></ul></ul>
  3. 3. Monopolistic Competition <ul><li>Attributes of Monopolistic Competition </li></ul><ul><ul><li>Many sellers </li></ul></ul><ul><ul><li>Product differentiation </li></ul></ul><ul><ul><li>Free entry and exit </li></ul></ul>
  4. 4. Monopolistic Competition <ul><li>Many Sellers </li></ul><ul><ul><li>There are many firms competing for the same group of customers. </li></ul></ul><ul><ul><ul><li>Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc. </li></ul></ul></ul>
  5. 5. Monopolistic Competition <ul><li>Product Differentiation </li></ul><ul><ul><li>Each firm produces a product that is at least slightly different from those of other firms. </li></ul></ul><ul><ul><li>Rather than being a price taker, each firm faces a downward-sloping demand curve . </li></ul></ul>
  6. 6. Monopolistic Competition <ul><li>Free Entry or Exit </li></ul><ul><li>Firms can enter or exit the market without restriction. </li></ul><ul><li>The number of firms in the market adjusts until economic profits are zero. </li></ul>
  7. 7. Figure 1 Monopolistic Competition in the Short Run Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price (a) Firm Makes Profit Profit- maximizing quantity Price Demand MR ATC Average total cost Profit MC
  8. 8. COMPETITION WITH DIFFERENTIATED PRODUCTS <ul><li>The Monopolistically Competitive Firm in the Short Run </li></ul><ul><ul><li>Short-run economic losses encourage firms to exit the market . This: </li></ul></ul><ul><ul><ul><li>Decreases the number of products offered. </li></ul></ul></ul><ul><ul><ul><li>Increases demand faced by the remaining firms. </li></ul></ul></ul><ul><ul><ul><li>Shifts the remaining firms’ demand curves to the right. </li></ul></ul></ul><ul><ul><ul><li>Increases the remaining firms’ profits. </li></ul></ul></ul>
  9. 9. Figure 1 Monopolistic Competitors in the Short Run Copyright©2003 Southwestern/Thomson Learning Quantity 0 Price (b) Firm Makes Losses Demand Price Loss- minimizing quantity Average total cost MR Losses ATC MC
  10. 10. The Long-Run Equilibrium <ul><li>Firms will enter and exit until the firms are making exactly zero economic profits. </li></ul>
  11. 11. Figure 2 A Monopolistic Competitor in the Long Run Copyright©2003 Southwestern/Thomson Learning Quantity Price 0 Demand MR ATC MC Profit-maximizing quantity P = ATC
  12. 12. Long-Run Equilibrium <ul><li>Two Characteristics </li></ul><ul><ul><li>As in a monopoly, price exceeds marginal cost. </li></ul></ul><ul><ul><ul><li>Profit maximization requires marginal revenue to equal marginal cost. </li></ul></ul></ul><ul><ul><ul><li>The downward-sloping demand curve makes marginal revenue less than price. </li></ul></ul></ul><ul><ul><li>As in a competitive market, price equals average total cost. </li></ul></ul><ul><ul><ul><li>Free entry and exit drive economic profit to zero. </li></ul></ul></ul>

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