1. c h a p t e r twelve © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn Quijano Monopolistic Competition: The Competitive Model in a More Realistic Setting

2. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 2 of 19 Monopolistic Competition: The Competitive Model in a More Realistic Setting Monopolistic competition A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.

3. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 3 of 19 The Demand Curve for a Monopolistically Competitive Firm 12 - 1 The Downward-Sloping Demand for Caffe Lattès at a Starbucks Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market LEARNING OBJECTIVE 1

4. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 4 of 19 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve Demand and Marginal Revenue at a Starbucks 12 – 1 CAFFÈ LATTES SOLD PER WEEK (Q) PRICE (P) TOTAL REVENUE (TR = P x Q) AVERAGE REVENUE (AR – TR/Q) MARGINAL REVENUE (MR = ΔTR/ΔQ) 0 1 2 3 4 5 6 7 8 9 10 $6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 $0.00 5.50 10.00 13.50 16.00 17.50 18.00 17.50 16.00 13.50 10.00 - $5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 - $5.50 4.50 3.50 2.50 1.50 0.50 -0.50 -1.50 -2.50 -3.50

5. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 5 of 19 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 12 - 3 The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm

6. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 6 of 19 LEARNING OBJECTIVE 2 12 - 4 Maximizing Profit in a Monopolistically Competitive Market How a Monopolistically Competitive Firm Maximizes Profits in the Short Run

7. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 7 of 19 What Happens to Profits in the Long Run? LEARNING OBJECTIVE 3 How Does Entry of New Firms Affect the Profits of Existing Firms? 12 - 5 How Entry of New Firms Eliminates Profits Don’t Confuse Zero Economic Profit with Zero Accounting Profit

8. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 8 of 19 What Happens to Profits in the Long Run? How Does Entry of New Firms Affect the Profits of Existing Firms? The Short Run and the Long Run For a Monopolistically Competitive Firm 12 – 2

9. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 9 of 19 The Short Run and the Long Run for the Macintosh 12 - 2 LEARNING OBJECTIVE 3

10. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 10 of 19 What Happens to Profits in the Long Run? A firm’s profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product. Is Zero Economic Profit Inevitable in the Long Run?

11. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 11 of 19 Comparing Perfect Competition and Monopolistic Competition 12 - 6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition LEARNING OBJECTIVE 4

12. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 12 of 19 Comparing Perfect Competition and Monopolistic Competition The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve. Excess Capacity under Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes. How Consumers Benefit from Monopolistic Competition

13. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 13 of 19 How Marketing Differentiates Products LEARNING OBJECTIVE 5 Marketing All the activities necessary for a firm to sell a product to a consumer. Brand Management Brand Management The actions of a firm intended to maintain the differentiation of a product over time.

14. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 14 of 19 What Makes a Firm Successful? LEARNING OBJECTIVE 6 12 - 7 What Makes a Firm Successful?

15. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. CHAPTER 12: Monopolistic Competition:The Competitive Model in a More Realistic Setting 15 of 19 Brand management Marketing Monopolistic Competition