Chapter+17+(+Monopolistic+competition)

Chapter 17 Monopolistic Competitions 

Source: http://internationalecon.com/Trade/Tch80/80img12.gif

(Introduction)

Monopolistic competition is a market in which many firms sell differentiated products. Its characteristics are similar to those of perfectly competitive markets and monopolies. For examples, in monopolistic competition markets, there are many sellers and the market has a free entry. However the products the firms sell are different to each other.

(Competition with Differentiated Products)

__//The Long Run Equilibrium//__

Monopolistically competitive markets have the identical pattern of profit maximization as the perfectly competitive markets. The profit that the original firms make encourages new firms to enter the market and as a result of increasing numbers of products, the demand curve shifts to the left. The shift of the demand curve to the left reduces the profit that each firm can earn and the exit will occur. As a result of this pattern, //the final profit that the firms get will be zero.//

__//The Short Run Equilibrium//__

The monopolistically competitive market firm uses the same rules as monopolists use for profit maximization: the firms choose the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price consistent with that quantity. //The profit-maximizing quantity will be found at the intersection point of the marginal revenue and cost curves.//

 (Monopolistic Versus Perfect Competition)

1) //excess capacity// - Firms produce goods, which match to the downward-sloping portion of their ATC curves. The quantity that minimizes the ATC is an efficient scale of the firm. Unlike firms in competitive markets, firms in monopolistic competitive markets produce below the efficient level; therefore, the firms have excess capacity.

2) //markup// - When the price is equal to average total cost, the price must be above the marginal cost. This is because the firms in monopolistically competitive markets have the marginal cost, which is always below the average total cost.

(Advertising)



__//The Critique of Advertising//__

- Much advertising is psychological rather than informational. - A commercial creates a desire that otherwise might not exist. - Advertising impedes competition and causes the larger markup over marginal cost than before.

__//The Defense of Advertising//__

- Firms use advertising to provide information such as the existence of new products, the prices of the goods, or the locations of retail outlets to customers. - Advertising allows buyers to make better decision in shopping and enhances the ability of markets to allocate its resources efficiently. - Advertising increases competition in the market.

 Source: http://i32.photobucket.com/albums/d20/simonthedude/advertisement.jpg

(Brand Names)

- Advertising is closely related to the existence of brand names. - Arguments:

a) //Critiques:// - Consumers’ willingness to buy more goods with the brand names on is an evidence of irrationality occurred by advertising.

b) //Defense:// - Brand names are useful for ensuring the consumers with high quality of products. - Brand names give consumers more information about quality of products they want to buy. - Brand names give firms an incentive to produce more products with high quality because of the consumers.

media type="youtube" key="WRQsug1e4V4" height="344" width="425"

Source: http://kr.youtube.com/watch?v=WRQsug1e4V4&feature=related

Questions for Review

1. How do critiques think advertisement as? 2. What happens to the profit in long run? 3. What are the characteristics of moralistically competitive markets?

Answers for the Questions

1. Critiques believe that the advertisements make consumers to buy products recklessly by providing them a desire in their products. 2. The profit in the long run will become zero because it follows the same pattern as the perfectly competitive markets. 3. There are many sellers and differentiated goods in the market. Moreover the firms are free to enter and exit the market.