Chapter+Seventeen

=Chapter 17 Monopolistic competition =  

 
 Monopolistic competition is combination of competitive market and monopoly. It has more than several sellers and buyers, product is different, and free entries and exits.

I. Monopolistic Competition in the short run Profit-maximizing quantity is found at the intersection of the marginal-revenue and marginal-cost curves. Price exceeds average total cost, so the firm makes a profit. Profit is below the average total cost, firm is unable to make a profit, so minimize its losses. The graph on the left shows the short run losses. Sources: http://www.bized.co.uk/glossary/small/moncomp_srtolr.gif

Monopolistic competitors maximize profit by producing the quantity at which marginal revenue equals marginal cost.This graph shows the monopolistic competition's loss. Average total cost is greater than the demand curve and price is below average total cost.

 II Monopolistic Competition in the long run When firms are making profit, firms have an incentive to enter the market. This entry increases the number of products from which customers. When firms are making losses, firms would exit and customers would have fewer products to choose from. The process of entry and exit continues until the firm in the market is making zero profit. Source:http://www.econweb.com/Sample/IndustryPolicy/graphs/MonopComp-ProdEffic-1.gif This graph shows monopolistic competition in the long run. There are shifting of demand curve because many firms enter and exit, so in the end there is zero profit where price equals average total cost.

Monopolistic competition is similar to monopoly because price exceeds marginal cost. Profit maximization requires marginal revenue to equal marginal cost. The demand curve is downsloping. We will talk about that little later. Like in a competitive market, there is zero economic profit in the long run.

III. Monopolistic VS. Perfect Competition Two differences between excess capacity and the markup Excess capacity: Under monopolistic competition, firms produce on the downward-sloping portion of their average total-cost curves. Free entry in competitive market allows firms to produce at the minimums of average total cost. The quantity produce at the efficient scale to minimize average total cost, but monopolistic competition produce at where marginal revenue equals marginal cost. So this means that they produce less than what is socially efficient. Markup: Price and marginal cost are different from perfectly competitive market. For competitive firm, marginal cost equals price. Price exceeds marginal cost because the firm has market power. Although there is zero-profit condition, it does NOT mean price equals marginal cost. For perfectly competitive, the firms are not eager to have another customer, but for a monopolistically competitive, firms are eager to have additional customer.   IV. Welfare of society One inefficiency of monopolistic competition is markup of price over marginal cost. Another inefficiency is the number of firms in the market may not be ideal. They may be too much or too little entry. Entry has two effects: first, since, consumers get some consumer surplus from new product, entry of new firm is positive externality and second, firms lose customers and profits from the entry of new competition. So monopolistic has deadweight loss


<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> - A monopolistic competitive market has characteristics such as many firms, different products, and free <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> entry - Monopolistic does not have profit in the long run like perfect competition, but its price does exceed marginal cost like monopoly. - Monopolistic competition has deadweight loss of monopoly because the price is higher than what should be at the efficient scale. <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> - different product allows monopolistic competition advertisement and brand names.

<span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">__Vocabulary__
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">monopolistically competition: a market structure in which many firms sell products that are similar but not identical <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">

__<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Question __
=<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> = <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> 1. Describe the demand curve for monopolistically competitive firm a. horizontal like perfectly competitive firm b. vertical like monopoly c. downsloping like monopoly d. upwardsloping like perfectly competitive firm

2. What are two differences between monopolistic and perfect competition 3. What are the pros and cons of advertisement? Answers to chap17

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