Chapter+17+Monopolistic+Competition.JAKS

=**Chapter 17. ** = =**Monopolistic Competition ** = 




 **Monopolistic competition:** a market structure in which many firms sell products that are similar but not identical.



 * 1)  Characteristics of Monopolistic competition.
 * 2)  Comparisons to Monopolistic market
 * 3)  Comparisons to Perfect Competition
 * 4)  Marketing / Advertising




 In Between Competitive Market & Monopoly = Oligopoly?? The concept is similar to that of oligopoly (a market structure in which only a few sellers offer similar or identical products), both considered a market structure in between a monopoly and perfect competition. __//However, oligopoly describes a market structure with only a few sellers, which is less competitive, while a monopolistic competition describes a market with many sellers, each of which is small compared to the market//__. But it is not a competitive market because each seller offers a unique, at least slightly, independent product. __Thus, while a perfectly competitive firm faces a horizontal demand curve at the market price, a competitive market has a downward-sloping demand curve.__

What does a Monopolistic Competition describe? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **Muchos sellers**: Many competing firms.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **Product Differentiation**: Each product of a firm is unique. This prevent firms from becoming a powerless price taker, which allows a downward-sloping demand curve.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **Free Entry**: Entry and exit are both free and thus the number of firms naturally alter and adjust until the economic profits are driven to zero: efficient point.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
The Monopolistically Competitive Firm in the Short Run **<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> __Competitive Firm follows monopolist’s rule for profit maximization__: it chooses the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price consistent with that quantity.
 * <span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">



The profit-maximizing quantity is found at the intersection of the marginal-revenue and marginal-cost curves. A monopolistically competitive firm chooses its quantity and price just as a monopoly does. In the short run = the two types are similar.

<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Long Run Equilibrium** <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> There’s a reason the short run is called short run, because it’s only temporary. Because firms can freely, without payment, can exit and enter the long run equilibrium is different. Profit makes people want to enter the firm, thus shifting the demand curve to the left. This increase in firms decreases profit for everyone. In contrast, losses encourage exit and exits shifts the demand curves to the right. //__This enter/exit movement continues until the economic profit equals zero and makes the market stabilized.__//



<span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">In conclusion <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> price exceeds marginal cost because in order to reach profit maximum, marginal revenue has to equal marginal cost because the downward demand curve makes marginal revenue smaller than the price. price = average total cost because free entry / exit drive economic profit to zero.

<span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">How’s this different to Long run equilibrium in a monopolistic market? <span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Because monopoly is the only seller of its product, it can earn a positive economic profit in the long run. However, the economic profit of a monopolistically competitive market has economic profit driven by the many entries and exits, zero.

**<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Monopolistic versus Perfect Competition **<span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">



2 main differences in these two types of markets: <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Excess Capacity **<span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Unlike Perfect Competition; under monopolistic competition, firms produce on the downward-sloping portion of their average-total-cost curves. Free entry in competitive markets drives firms to produce at the minimum of average total cost. <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Makeup over Marginal Cost **<span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Makeup over marginal cost: when price exceeds marginal cost because the firm always has some market power. <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">How is this MoMC consistent with free entry and zero profit? <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Types of Inefficiencies **<span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">1. Markup of price over marginal cost <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">2. number of firms in the market may not be ideal: there may be too much or too little entry / exit.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> excess capacity
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> markup
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Efficiency scale: quantity that minimizes average total cost. In the long run, perfectly competitive firms produce at the efficient scale.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Monopolistically competitive firms produce below this level = excess capacity.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Excess capacity: a monopolistically competitive firm could increase the quantity it produces and lower the average total cost of production.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> While the zero-profit ensures that price equals aver total cost, it does not make sure that price equals marginal cost.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Thus, a perfectly competitive firm does not care about profit from an extra unit sold (profit is zero) while a monopolistically competitive firm can gain from the extra unit sold at the price because the price exceeds marginal cost.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">some consumers who are willing to pay more than the marginal cost of production will not be able to buy it
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">thus a monopolistically competitive market ha the deadweight loss of monopoly pricing.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Entries would have two effects, external to the firm:
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Product-diversity externality: surplus from the introduction of a new product, entry of a new product is always a positive externality on consumers.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Business-stealing externality: old firms lose profit from new competitors, the entry imposes a negative externality on existing firms.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
<span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">To Advertise or Not - that is the question... **<span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Critique of Advertising <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> argue that.. <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Defense of Advertising <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> argue that.. <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> IV. Conclusion
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Each firm has an incentive to advertise to attract ore consumers.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> More heterogeneous firms advertise more.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> firms advertise to manipulate people’s tastes
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> tries to convince consumers that products are more different than they truly are: with a less elastic demand curve, each firm charges a larger markup over marginal cost.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Brand names: it causes consumers to perceive difference that do not really exist. consumers’ willingness to pay more for the brand-name good, these critics asses, is a form of irrationality fostered by advertising.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> it provides information to customers: prices of the goods, existence of new products, locations of retail outlets.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> fosters competition
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> allows new firms to enter more easily because it gives entrants a means to attract customers from existing firms.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> the willingness of the firm to spend a large amount of money on advertising can itself be a signal to consumers about the quality of the product and thus cheap advertising is not effective.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Brand names:
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> it provide consumers with information about quality when quality cannot be easily judged in advance.
 * <span style="color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> give firms an incentive to maintain high quality because firms have a financial stake in maintaing the reputation.

<span style="border-collapse: separate; color: #ff0600; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">A clean up of Monopolistic Competition!! Ready Set Go!!

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<span style="color: #ad0000; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; text-align: center;">Market Structure
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Perfect Competition || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Monopolistic Competition || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Monopoly ||  ||   ||
 * <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Features that all three market structures share || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Goal of firms || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Maximizing profits || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Maximizing profits || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Maximizing profits || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Rules for maximizing || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">MR = MC || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">MR = MC || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">MR = MC || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Can earn economic profits in the short run? || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Features that monopolistic competition shares with monopoly || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Price taker? || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Price || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P = MC || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P > MC || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> P > MC ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Produces welfare-maximizing level of output? || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||  ||
 * <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Features that monopolistic competition shares with competition || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Number of firms || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Many || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Many || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">One || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Entry in long run? || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Can earn economic profits in long run? || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">No || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Yes || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> ||

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Thank You

<span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> =<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 17px; text-align: center;">Review Questions ** = <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

Economies of scale allow firms to <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following is a characteristic of monopolistic competition? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following is a characteristic of monopolistic competition? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Free Response Question Compare perfect competition to monopolistic competition in terms of efficiency.
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">move upward on the AVC curve and hence reach a lowest cost point.
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">move downward on the AVC curve and hence reach a lowest cost point
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">enjoy the benefits of smal output that will result in the highest revenue
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">be in a position that affords the greatest flexibility of production
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">operate such that cost savings makes no difference
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P > MC
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Efficiency
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Mostly price competition
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P = C
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Homogenous or similar products
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Economically efficient in the long run
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Pricing at minimum ATC in long run
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Excess capacity
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Very few competitors
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Most dominant market structure in United States

Answers 17. JAKS

<span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> =<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Works Cited ** = =<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> = <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">image: http://www.digital-fotofusion.co.uk/competition/prizes.html image: http://www.neohide.com/100-top-brands-2008 Video: http://www.youtube.com/watch?v=erdzOu3juNI&feature=related image: http://peppercomblog.typepad.com/my_weblog/2008/07/debating-the-fa.html Review Questions: Barrons AP Micro / Macro Economics 2007-2008 <span style="border-collapse: separate; color: #00ff00; font-family: Impact,Charcoal,sans-serif; font-size: 49px; font-style: normal; font-variant: normal; letter-spacing: normal; line-height: 74px; orphans: 2; text-align: center; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">