Step+17+Monopolistic+Competition-+Sarah

=Monopolistic Competition =  __**Introduction**__ I bet at least once in your life, you saw or played the game "monopoly." In the game, players try to dominate and monopolize a certain market. Yet the meaning of a "monopolistic competition" somewhat differs. A monopolistic competition is simply used to describe a market structure in which many firms sell products that are similar but not identical. Let's see what this means:)   __**What We Will Learn**__ -What is a monopolistically competitive market? -Equilibrium in a monopolistically competitive market -Perfect Competition -Advertising and its effects

__**Key Terms**__ -monopolistic competition: market with many sellers but with products that are similar (not identical) -Imperfect competition—refers to those market structures that fall between perfect competition and pure monopoly

 __**Topics**__

• Types of Imperfectly Competitive Markets -Monopolistic Competition—many firms selling products similar, but not identical -Oligopoly—only a few sellers, each offering a similar or identical product to others

A Monopolistically Competitive Market is characterized by three things below: There are many firms competition for the same group of customers Product examples include: books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc Each firm produces a product that is at least slightly different from those of other firms Rather than being a price taker, each firm faces a downward-sloping demand curve Firms can enter or exit the market without restriction The number of firms in the market adjusts until economic profits are zero
 * -Many sellers:**
 * -Product differentiation**
 * -Free entry and exit**


media type="file" key="AP ECON video I.m4v" width="480" height="480" The Monopolistically Competitive Firm in the Short Run i. Short-run economic profits encourage new firms to enter the market. This: • Increases the number of products offered • Reduces demand faced by firms already in the market • Incumbent firms’ demand curves shift to the left • Demand for incumbent firms’ products falls, and their profits decline

ii. Short-run economic losses encourage firms to exit the market. This: • Decreases the number of products offered • Increases demand faced by the remaining firms • Shifts the remaining firms’ demand curves to the right • Increases the remaining firms’ profits

iii. The Long-Run Equilibrium Firms will enter and exit until firms are making exactly zero economic profits

ii. Two Characteristics: • As in a monopoly, price exceeds marginal cost (Profit maximization requires marginal revenue to equal marginal cost) • As in a competitive market, price equals average total cost—free entry and exit drive economic profit to zero


 There are two noteworthy differences between monopolistic and perfect competition—//excess capacity// and //markup//

i. Excess capacity • There is no excess capacity in perfect competition in the long run • Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm • There is excess capacity in monopolistic competition in the long run • In monopolistic competition, output is less than the efficient scale of perfect competition

ii. Markup Over Marginal Cost • For a competitive firm, price equals marginal cost • For a monopolistically competitive firm, price exceeds marginal cost • Because price exceeds marginal cost, an extra unit sold at the posted price means more profit for the monopolistically competitive firm


<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> i. Monopolistic competition does not have all the desirable properties of perfect competition ii. There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of the price over marginal cost iii. However, the administrative burden of regulating the pricing of all firms that produce differentiated products would be overwhelming iv. Another way in which monopolistic competition may be socially inefficient is that the number of firms in the market may not be the “ideal” one—there may be too much or too little entry

v. Externalities to entry include: • Product-variety externalities—because consumers get some consumer surplus from the introduction of new product, entry of a new firm conveys a positive externality on consumers • Business-stealing externalities—because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> 4) Advertising
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> When firms sell differentiated products and charge prices above marginal cost, each firm has incentive to advertise in order to attract more buyers for particular product

Critics of advertising argue that… i. Firms advertise in order to manipulate people’s tastes ii. Impedes competition by implying products are more different than truly are iii. Creating brand names cause consumers to perceive differences that do not really exist

Defenders argue that… i. Advertising provides information to consumer ii. Advertising increases competition by offering a greater variety of products and prices

Economists have argued that brand names may be useful for consumers to ensure that the goods they are buying are of high quality • Providing information about quality • Giving firms incentive to maintain high quality

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">__**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> Conclusion **__ There's a difference between a monopoly and a monopolistic competition:) Make sure you know the difference and how the economic profit becomes zero in the long run!

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">__**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;">Quiz **__What is the difference between a oligopoly and a monopolistic competition? -<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">In oligopoly there are few sellers offering a similar or identical product. In monopolistic competition many firms sell similar products, but they are not identical.

In a long run firms will make a zero economic profit. Why? -When firms enter in to the market that has high demand, the supply increases and the increased supply and increased demand balances out. Then the firms exit the market, returning the market back to the zero economic profit.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"><span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> __**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> Sources **__ Mankiw, Gregory N. //Principles of Microeconomics//. 4th ed. Print. http://scrapetv.com/News/News%20Pages/usa/Images/logo-mr-monopoly.jpg