4. Differentiated product
Product differentiation: the process of
creating real or apparent differences between
goods and services => price maker
A differentiated product has close, but not
perfect substitutes.
Firms center on non- price competition in
addition to price competition.
5. Each firm is so small relative to the total
market that its pricing decisions have a
negligible effect on the market price.
Many Small Sellers
6. Easy Entry and Exit
Not as easy as in Perfect Competition because
of product differentiation
7. Competition with Differentiated Products
The Monopolistically Competitive Firm in the
Short Run:
- Each firm in monopolistic competition faces
a downward-sloping demand curve.
- The monopolistically competitive firm
follows the monopolist's rule for maximizing
profit
1. MR = MC
2. It sets the price using the demand curve
to ensure that consumers will buy the amount
produced.
8. - The monopolistically competitive firm is
earning a profit or loss by comparing price
and average total cost.
1. If P > ATC, the firm is earning a profit.
2. If P < ATC, the firm is earning a loss.
3. If P = ATC, the firm is earning zero
economic profit.
10. The Monopolistic Competition
in the Long-Run
_ When firms in monopolistic competition
are making profit, new firms have an
incentive to enter the market.
+ The demand curve faced by each firm
shifts to the left.
_ When firms in monopolistic competition
are incurring losses, firms in the market will
have an incentive to exit.
+ The demand curve for each firm shifts
to the right.
11. _ The process of exit and entry continues until
firms are earning zero profit.
+ Price is equal to average total cost and the
firm is earning zero economic profit.
14. Advantages of Monopolistic Competition
1. The Promotion of Competition (lack of Barriers to Entry) .
2. Differentiation Brings Greater Consumer Choice and
Variety
- This provides greater choice and variety of products and
services for consumers to purchase .
3. Product and Service Quality – Development
- Firms improve product quality in order to gain economic
profit.
4.Consumers Become More Knowledgable of Products
- They can gain an understanding of the unique features
and aspects that certain products have compared to that of
others.
15. Disadvantages of Monopolistic Competition
1. They Can be Wasteful -- Liable of Excess Capacity
- Firms don't produce enough output to efficiently
lower the average cost and benefit from economies of
scale.
2. Allocatively Inefficient
- It is allocatively inefficient as not enough of the
product gets produced for society to benefit .
3.Higher Prices
- A higher price is charged than would be the case
under Perfect Competition.
4. Advertising – Wasteful.
16. Compare Monopolistic Competition with Monopoly
Monopolistic Competition Monopoly
Many products One product
Few barriers to entry No chance of entry
Forced Innovation No innovation
No market control Absolute market
control
17. Compare Monopolistic Competition with Monopoly
Monopolistic Competition Oligopoly
Many products Few products
Few barriers to entry High barriers of entry
Forced Innovation Little innovation
No market control Large market control
22. Differences in qualities such as type, style, quality,
reputation, appearance, and location that tend to
distinguish them from each other.
23.
24. Easy entry and exit
•Less capital than railway,
airport, oil …
•No barriers to entry or exit.
•Firm unable to cover its
costs can leave the market
without incurring liquidation
costs