Review Identify the 4 market structures. Identify the 3 types of market. Identify 4 types of monopoly. Explain why D is greater than MR in monopoly. Define price discrimination. List characteristics of perfect competition. List monopoly characteristics. Examples of non-price competition. List three economies of scales. Name 10 types of candy.

Differentiated Products 2

Monopolistic Competition

Perfect Competition Pure Monopoly Monopolistic Oligopoly Characteristics of Monopolistic Competition: Relatively Large Number of Sellers Differentiated Products Some control over price Easy Entry and Exit (Low Barriers) A lot of non-price competition (Advertising)

“Monopoly” + ”Competition” QUALITIES Monopolistic Qualities: Control over price of own good due to differentiated product Demand is greater than MR Plenty of Advertising Not efficient Perfect Competition: Large number of smaller firms Relatively easy entry and exit Zero Economic Profit in Long-Run since firms can enter

Differentiated Products Goods are NOT identical. Firms seek to capture a piece of the market by making unique goods. Since these products have substitutes, firms use NON-PRICE Competition. Examples of NON-PRICE Competition Brand Names and Packaging Product Attributes Service Location Advertising (Two Goals) Increase Demand Make demand more INELASTIC

Drawing Monopolistic Competition

Long – Run Monopoly Monopolistic Competition Monopolistic Competition Quantity Price MC Review the monopoly making/losing money graphs. Shaded the area of profit/loss, TR & TC. How to get rid of the “economic profit/loss”  No economic profit  Long-Run  TR=TC Make sure the ATC only TANGENT with demand, NOT intercept. D MR

In the short-run, it is the same graph as a monopoly making profit Monopolistic Competition is made up of prices makers so MR is less than Demand In the long-run, new firms will enter & drive DOWN DEMAND for firms already in the market. Firms enter so demand falls until there is no economic profit In the short-run, it is the same graph as a monopoly making profit Price and quantity falls and TR=TC Price MC MR D MR D ATC DLR MRLR P1 PLR Profit TR = TC QLR / Q1 Q In the LONG-RUN EQUILIBRIUM Quantity where MR=MC up to P=ATC 9

What happens when there is a loss? In the long-run, firms will leave & drive UP DEMAND for firms already in the market. What happens when there is a loss? In the short-run, it is the same graph as a monopoly making a loss Firms leave so demand increases until there is no economic profit Price and quantity increase and TR=TC Price ATC MC DLR MRLR D MR D MR PLR P1 Loss TR = TC Q Q1 /QLR 10

Why does DEMAND shift? When short-run profits are made… When short-run losses are made… New firms enter. New firms mean more close substitutes and less market shares for each existing firm. Demand for each firm falls. Firms exit. Result is less substitutes and more market shares for remaining firms. Demand for each firm rises.

Are Monopolistically Competitive Firms Efficient? LONG-RUN EQUILIBRIUM Are Monopolistically Competitive Firms Efficient? Productively Efficient? Allocatively Efficient ? No, P ≠ Min ATC No, P ≠ MC This firm also has EXCESS CAPACITY Price MC ATC The firm can produce at a lower cost but it holds back production to maximize profit. PLR QLR /QSO/QPE Excess Capacity MR D Quantity 12

Excess Capacity Given current resources, the firm CAN produce at the lowest costs (min ATC) but they decide not to. The output b/w the minimum ATC & the profit maximizing. Not the amount under-produced.

MONOPOLISTIC COMPETITION Advantages of MONOPOLISTIC COMPETITION Large number of firms and product variation meets societies needs. Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms. Ex: Nike might continue to make above normal profit because they are a well known brand.

FOUR MARKET MODELS

Graphing Draw the graph for a monopolistic competitive fast food restaurant making $400 total profit by selling 200 burgers at $4 each. Label D, MR, MC, Price, and Quantity. Show shifts that will occur in the long-run and identify TR, TC, and profit.

Practice Question   Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would: have more economic profit. have a loss. also achieve allocative efficiency. be under producing. be in long-run equilibrium. Answer is B. Draw a monopolistic competitive graph in the long run. *