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Monopolistic Competition
This document discusses monopolistic competition, which assumes many producers and consumers, slight product differentiation, producers that have some control over price as "price makers," and low barriers to entry and exit. Examples of industries with monopolistic competition include shoe repairs, taxis, coffee shops, hair salons, dry cleaners, and bars. Under monopolistic competition in the short run, firms have downward sloping demand curves and will produce at the quantity where marginal revenue equals marginal cost to maximize profits, earning supernormal profits when price is above average cost.
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Monopolistic Competition
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- 2. Assumptions: Monopolistic Competition 1.There are many producers and many consumers - the industry concentration ratio is low 2. Consumers are aware that there are non-price differences among products i.e. there is slight product differentiation – competition is strong and plenty of consumer switching takes place 3. Producers have some control over price - they are “price makers” not “price takers” but the price elasticity of demand is higher than it would be under monopoly (the cross-price elasticity is high) 4. Barriers to entry and exit are low – this allows producers respond to changing profit signals
- 3. Examples of MonopolisticCompetition Shoe repairs and key makers Taxi and minibus companies Sandwich bars and coffee stores Hairdressing salons Dry-cleaners and launderettes Bars and Nightclubs
- 4. Short Run Price,Output and Profit MC Price and Cost Output AC MR AR Firms have downward-sloping demand curves because they have some degree of price-setting power
- 5. Short Run Price,Output and Profit MC Price and Cost Output AC MR AR P1 Q1We assume that firms are profit maximisers where MC=MR
- 6. Short Run Price,Output and Profit MC Price and Cost Output AC MR AR P1 Q1 C1 At price P1 and Q1, supernormal profits are being made because Price > AC
- 7. Short Run Price,Output and Profit MC Price and Cost Output AC MR AR P1 Q1 C1 Supernormal Profit At price P1 and Q1, supernormal profits are being made because Price > AC
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