Monopolistic. Monopolistic Competition. Competition. Unit 4: Imperfect Competition 4-3. Monopolistic Competition

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1 7 February 2012 A Microeconomics 1 erfect Monopolistic Oligopoly ure Monopoly Monopolistic 1 Characteristics of Monopolistic : Relatively Large Number of Sellers ifferentiated roducts Some control over price Easy Entry and Exit (Low Barriers) A lot of non-price competition (Advertising) 2 Examples: 1. Fast Food Restaurants 2. Furniture companies 3. Jewelry stores 4. Hair Salons 5. Clothing Manufacturers Monopoly + Monopolistic ualities Control over price of own good due to differentiated product greater than lenty of Advertising Not efficient erfect ualities Large number of smaller firms Relatively easy entry and exit Zero Economic rofit in Long-Run since firms can enter 3 4 ifferentiated roducts 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-RICE. Examples of NON-RICE Brand Names and ackaging roduct Attributes Service Location Advertising (Two Goals) 1. Increase emand 2. Make demand more INELASTIC 5 ifferentiated roducts 6 San asqual High School, Escondido, CA

2 7 February 2012 A Microeconomics 2 Review 1. Identify the 4 market structures. 2. Explain why is greater than. 3. efine rice iscrimination. 4. List characteristics of monopolistic competition. 5. List Monopolistic ualities. 6. List Competitive ualities. 7. List examples of non-price competition. 8. List two goals of advertising. 9. Name 10 types of Candy. rawing Monopolistic 7 8 Monopolistic is made up of prices makers so is less than emand In the short-run, it is the same graph as a monopoly making profit Firms enter so demand falls until there is no economic profit Firms enter so demand falls until there is no economic profit rice and quantity falls and TR=TC LONG-RUN EUILIBRIUM uantity where = up to rice = LR LR LR 11 LR 12 San asqual High School, Escondido, CA

3 7 February 2012 A Microeconomics 3 Why does EMAN shift? When short-run profits are made New firms enter. New firms mean more close substitutes and less market shares for each existing firm. emand for each firm falls. When short-run losses are made Firms exit. Result is less substitutes and more market shares for remaining firms. emand for each firm rises. 13 What happens when there is a loss? In the short-run, the graph is the same as a monopoly making a loss Firms leave so demand increases until there is no economic profit Firms leave so demand increases until there is no economic profit rice and quantity increase and TR=TC LR LR 16 Are Monopolistically Competitive Firms Efficient? LONG-RUN EUILIBRIUM Not Allocatively Efficient because Not roductively Efficient because not producing at Minimum LR 17 LR Socially Optimal 18 San asqual High School, Escondido, CA

4 7 February 2012 A Microeconomics 4 LONG-RUN EUILIBRIUM This firm also has EXCESS CAACITY LR LR Socially Optimal 19 Excess Capacity Given current resources, the firm can produce at the lowest costs (minimum ) but they decide not to. The gap between the minimum output and the profit maximizing output. Not the amount underproduced 20 LONG-RUN EUILIBRIUM The firm can produce at a lower cost but it holds back production to maximize profit LR Excess Capacity LR rod Efficient 21 ractice uestion Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would: A) have more economic profit. B) have a loss. C) also achieve allocative efficiency. ) be under producing. E) be in long-run equilibrium. 22 Advantages of MONOOLISTIC COMETITION FOUR MARKET MOELS Large number of firms and product variation meets societies needs. Nonprice (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 San asqual High School, Escondido, CA

5 7 February 2012 A Microeconomics 5 Graphing 1. raw the graph for a monopolistic competitive fast food restaurant making $400 total profit by selling 200 burgers at $4 each. Label,,, rice, and uantity. 2. Show shifts that will occur in the longrun and identify TR, TC, and profit. 25 San asqual High School, Escondido, CA