Chapter+17+-+Monopolistic+Competition+CDJ

**Monopolistic Competition**

http://www.flickr.com/photos/sbluerock/305816186/
 * Definition:** market that sells differentiated products with many firms.

Competition with Differentiated Products

In the **SHORT RUN** ... http://wps.prenhall.com/wps/media/objects/988/1012152/chapter13/13.3.gif If you take a look at the graph above, you can see that for the **first** graph, the **price exceeds the average total cost**. When the price is above ATC, the firm makes a profit. However, as you can see for the **2nd graph**, when the **price is below the average total cost **, the firm does not make profit, but instead lose its profits. Thus, just as how monopoly earns profits through the same way, monopoly and monopolistic competition has similar short-run market structure.

In the **LONG RUN ** ...however, http://members.shaw.ca/h-chartrand/images/Ch%2012%20Mono%20Comp%20&%20Oligop/Fig.%2012.2a%20Mono%20Comp%20LR%20EQ.gif When the firm is making profits, other firms will want to enter the market as well due to the characteristic of "free-entry" for monopolistic competition. As the number of products increase, the demand for each of the firms' will fall, which in return will create **loss** in profit. Due to decrease in demand for the firms, such demand curve will shift to the left.

However, when the firms are making losses and exists, there will be fewer products to choose from. This will make the demand of each firms to stay in the market and earn more profits through less number of selection left in the market. This will allow the demand curve for the firms to shift back to the right.

As the process of "free-entry and free-exit" continues, the firms will earn **exactly zero economic profit**. In other words, when the two curves of the demand curve and the average total cost curve are tangent to each other, the profit equals to zero.

 Monopolistic versus Perfect Competition

In the long run, **perfectly competitive firms** produce at the **efficient scale** because as the free entry and free exit occurs, the zero profit will occur at the minimum of the average total cost. However, it is different from the **monopolistic competition**. They do **<span style="font-size: 120%; color: rgb(190, 66, 30);">not produce at the efficient scale **; in fact, their tangency is below the efficient scale. If you take a look at the graph above, you can see that the point of Q2 and M are further apart. The efficient scale is at the point 'M' where as the zero profit that the monopolistic competition maximizes is the point Q2. Therefore, such situation for the monopolistic competition is said to be "<span style="font-size: 140%; color: rgb(188, 41, 156);">excess capacity ".

The Second difference between monopolistic competition and perfect competition is that..


 * Perfectly competitive firm has price that <span style="font-size: 120%; color: rgb(15, 75, 149);">exactly equals the marginal cost.
 * However, the monopolistically competitive firm has the price that always <span style="font-size: 120%; color: rgb(113, 18, 171);">exceeds the marginal cost.
 * Adding on to the second statement: Because the price exceeds the marginal cost, it <span style="font-size: 120%; color: rgb(13, 145, 88);">creates the dead-weight loss for the monopolistically competitive firms.

** Before we move on to the advertisement, take a minute<span style="font-size: 120%; color: rgb(181, 65, 23);"> **rest** watching one of the advertisements ! <span style="font-size: 150%; color: rgb(159, 15, 15);">media type="youtube" key="2RHEjneBRak" height="344" width="425" After watching the advertisement, how do you feel? Many people has different perspectives of looking at the advertisements; thus, there are <span style="font-size: 120%; color: rgb(96, 6, 6);">**debates** over advertising:
 * <span style="font-size: 150%; color: rgb(159, 15, 15);">Advertising

media type="file" key="econ5.mov"<span style="color: rgb(127, 11, 229);"> On the other hand, the other side would <span style="font-size: 130%; color: rgb(184, 40, 40);">**defend** their point by saying that advertising is actually ...
 * Helpful in a way that it makes the markets to be **<span style="font-size: 120%; color: rgb(57, 139, 50);">more competitive **. Since markets try to obtain audiences attention, markets would try to come up with a way to get "their" products to be sold
 * Beneficial for the audiences because they could **<span style="font-size: 120%; color: rgb(246, 81, 81);">attain information ** about the product through advertisement

Therefore, the two contrasting perspectives show the different opinions each have about the advertisement. Brand Names **
 * <span style="font-size: 140%; color: rgb(1, 0, 255);">



Brand names is similar to the advertising - similar in a way how it divides into <span style="font-size: 120%; color: rgb(228, 47, 47);">two different sides.

Mainly, the **critique** of the brand names argue that it causes consumers to create **<span style="font-size: 130%; color: rgb(230, 220, 45);">"perceive differences" ** that are not really true. For example, if you want to eat a hamburger and all you see is McDonald and some other hamburger store that you have never heard or seen before. Then the brand name of **<span style="font-size: 120%; color: rgb(135, 23, 23);">"McDonalds" ** would immediately cause the consumers to buy the hamburgers from the McDonalds.

However, the **defenders** would defend their point by emphasizing that the company will have an **<span style="font-size: 120%; color: rgb(56, 109, 128);">incentive to maintain a good quality **. Since many people depend on the "brand-names", it would ensure for such companies to keep up with their good qualities.

http://www.flickr.com/photos/yusheng/404434437/in/set-72157594316173820/

Furthermore, another example of the brand name is LOUIS VUITTON Take a look at the video below: media type="youtube" key="puF5c8Ihbek" height="295" width="480"

<span style="font-size: 140%; color: rgb(167, 22, 22);">**Conclusion:**
 * In the short run, the monopolistically competitive firms make profits when the price is above the Average Total Cost
 * In the long run, the demand curve is tangent to the Average Total Cost curve
 * However, because the price exceeds the marginal cost, it creates normal dead weight loss and has excess capacity, whereas for perfectly competitive firm, the price equals marginal cost, being efficient.
 * Advertisement is good in a way that it informs the audience; however it is bad because it manipulates people's tastes
 * Brand names causes "perceive differences"


 * <span style="font-size: 140%; color: rgb(255, 0, 127);">Question and Answer **


 * <span style="font-size: 130%; color: rgb(35, 42, 118);">1. Name one of the critique of advertising and defend such point. **

1A. One of the critique of advertising is that it manipulates people's tastes. However, for such statement, the defenders would argue that instead of manipulating, advertisement allows the audiences to attain information about certain object before buying them. Thus, instead of saying that it controls over people's tastes, advertisement actually guides you to buy with an information given.


 * <span style="font-size: 130%; color: rgb(64, 151, 212);">2. Why is monopolistically competitive firm similar to monopoly in the short run? **

2A. Monopolistically competitive firm is similar to the monopoly in the short run because when the price is above the Average Total Cost, the firm makes positive profits. However, when the price is below the Average Total Cost, then the firm makes negative profits -losses profits. Thus, obtaining and losing profits according to where the price is set, they are similar in the short run.