Presentation on theme: "Monopolistic Competition"— Presentation transcript:
1 Monopolistic Competition Chinese FoodFuneral ServicesMonopolistic CompetitionCharacteristics of Monopolistic Competition1. Many sellers2. Product differentiation3. Free entry and exit
2 The Market for Chinese Food in NYC Many sellers: Citysearch lists 1,832 Chinese restaurants in NYC2. Product differentiation: For people who want it…blandspicyKosherfast3. Free entry and exit: restaurants are constantly opening and closing.
4 Differentiated Products Each Chinese restaurant produces meals that are slightly different from those of other Chinese restaurants.Rather than being a price taker, each Chinese restaurant faces a downward-sloping demand curve.Free Entry or ExitFirms can enter or exit the market without restriction.The number of firms in the market adjusts until economic profits are zero.
7 Over the last few years, a large number of Chinese from Fujian Province have been smuggled into New York City.Their “desperation” makes “them highly desirable as laborers” (NYTimes, 7/22/2001).Indeed, signs litter the windows of Chinese restaurants advertising jobs for “hard-working Fujianese,” including the front window of the Silk Road Palace.
8 MC2 Total Revenue = A+B Total Cost = B Econ Profits = A A ATC2 B D MR ATC(Qπ2)DMRQπ2
9 Short-run economic profits encourage new Chinese Restaurants to enter the market. This: Increases the variety in Chinese meals.Reduces demand faced by restaurants already in the market.Incumbent restaurants’ demand curves shift to the left.Demand for the incumbent restaurants’ meals fall, and their profits decline.
10 The Long-Run Equilibrium Chinese restaurants will enter and exit until the firms are making exactly zero economic profits.
11 MC2 ATC2 MR3 D3 Qπ3 P3= The demand curve is tangent to the ATC curve. And this tangency lies vertically above the intersection of MR and MC.MR3D3Qπ3
12 Monopolistic versus Perfect Competition There are two noteworthy differences between monopolistic and perfect competition:Excess capacityMarkup over marginal cost
13 MC2 ATC2 MR3 D3 Qπ3 P3= The demand curve is tangent to the ATC curve. And this tangency lies vertically above the intersection of MR and MC.MR3D3Qπ3
14 Monopolistic versus Perfect Competition Excess CapacityFree entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm..In monopolistic competition, output is less than the efficient scale of perfect competition.
15 Monopolistic versus Perfect Competition (a) Monopolistically Competitive Firm(b) Perfectly Competitive FirmPricePriceMCATCMCATCDemandMRPQuantityproducedEfficientscaleP=MCMR(demandcurve)Quantity produced =Efficient scaleQuantityQuantity
16 Monopolistic versus Perfect Competition Markup over Marginal CostFor a competitive firm, price equals marginal cost.For a monopolistically competitive firm, price exceeds marginal cost.
18 Monopolistic Competition and the Welfare of Society There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost.However, it may be that people are willing to incur the cost to have the greater variety offered by monopolistically competitive markets.