TPS Write down a list of restaurants which serve basically the same food. Monopolistic Competition
Defining Monopolistic Competition Somewhere between Perfect competition and an Oligopoly Many firms but NOT as many as PC Differentiated product Each firm has some ability to set the price of their product. No barriers to entry and exit. Inefficient market
Monopolistic Competition in the Short Run Short-run economic profit encourages firms to enter the market TT = MR = MC at Q P = intersection of Q and MR = MC Positive economics profit is P > ATC
Monopolistic Competition in the Short Run Quantity 0 Price Profit- maximizing quantity Price Demand MR ATC Firm Makes Profit Average total cost Profit MC
Monopolistic Competition in the Short Run Short-run economic losses encourage firms to exit the market. Negative economics losses is P < ATC
Monopolistic Competitors in the Short Run Demand Quantity 0 Price Loss- minimizing quantity Average total cost Firm Makes Losses MR Losses ATC MC
Monopolistic Competition in Long-Run Equilibrium Firms will enter and exit until the firms are making exactly zero economic profits.
Monopolistic Competitor in the Long Run Quantity Price 0 Demand MR ATC MC Profit-maximizing quantity P =ATC The demand curve is tangent to the ATC curve. And this tangency lies vertically above the intersection of MR and MC.
Monopolistic Competition versus Perfect Competition Two differences Excess capacity Markup over marginal cost
Monopolistic versus Perfect Competition Excess Capacity is … Firms produce less than the output at which ATC is minimized
Monopolistic Competition versus Perfect Competition Quantity 0 Price Demand Monopolistically Competitive Firm Quantity 0 Price P=MCP=MR (demand curve) Perfectly Competitive Firm MC ATC MC ATC MR Efficient scale P Quantity produced Quantity produced = Efficient scale
Monopolistic Competition versus Perfect Competition Markup over Marginal Cost Markup = P - MC More profit is generated
Monopolistic Competition versus Perfect Competition Quantity 0 Price Demand Monopolistically Competitive Firm Quantity 0 Price P=MCP=MR (demand curve) Perfectly Competitive Firm Markup MC ATC MC ATC MR Marginal cost P Quantity produced Quantity produced
Monopolistic Competition versus Perfect Competition Quantity 0 Price Demand Monopolistically Competitive Firm Quantity 0 Price P=MCP=MR (demand curve) Perfectly Competitive Firm Markup Excess capacity MC ATC MC ATC MR Marginal cost Efficient scale P Quantity produced Quantity produced = Efficient scale
Product Differentiation Differentiation by Style or Type Think pizza!! Deep-dish crust v. thin crust v. stuffed crust Consumers have different tastes Producers able to increase profits by differentiating their product.
Product Differentiation Differentiation by Location Nearer to you is better than farther away. You may be willing to pay more when it’s closer/more convenient to/for you.
Product Differentiation Differentiation by Quality Mercedes v. Kia Prices higher for Mercedes due to perceived/actual quality difference.
Advertising Advertising delivers two different messages: Information persuasive
Advertising Informative Store hours What we sell Extra services
Advertising Persuasive ‘yummiest French fries’ ‘Just do it!’ ‘this house is charming and located in a lovely neighborhood.’ Use of humor, celebrities, special effects and/or musical jingles.
Brand Names Brand Names are … Owned by particular companies Used to differentiate products in consumer’s minds We think Kleenex for facial tissue. Many other brands of facial tissue. Name brand v. store brand. Ingredients essentially the same Name brand cost more.