Description
defines and explains the features of monopolistic competition. It also explains Price and Output Determination in Monopolistic Competition.
Monopolistic Competition
Definition
• Monopolistic competition refers to a situation where there are many sellers of a differentiated products. • Many firms are making close substitutes but not perfect substitutes. • Products are differentiated each seller can sell independently decide his own price and output policies.
Characteristics
• Many number of sellers • Product differentiation – Advertisement – Patent rights and trade marks – Quality differentiation • Freedom of entry of the new firms and exit of the old firms • Higher elasticity of demand.
Price and Output Determination in Monopolistic Competition
• • • •
Given large number of buyers and sellers Independent action Some monopoly power due to product differentiation The firm will produce the level of output where MR=MC to maximize its profits. – The MR curve lies below the firm’s demand curve, the firm will maximize profits where price (P) > MC. – Profit = (P – ATC) x Q.
Profits in Long Run
• • Short-run profits give entrepreneurs an incentive to enter a market and establish new firms. The demand curve of an established firm shifts to the left and becomes more elastic as new firms enter the market. Entry will continue until the firm’s demand curve is tangent to its ATC curve. In the long run: – P = ATC and the firm breaks even (zero economic profit). – The firm’s demand curve is more elastic. Short-run losses mean firms will exit their market. As a result:
– – The demand curve for a firm remaining in the market shifts to the right and becomes less elastic. Exit continues until the representative firm can charge a price equal to ATC.
•
•
Excess Capacity
• The equilibrium of the firms occurs at an output less than the one at which average total cost is minimum. • The excess capacity theorem states that the equilibrium for the monopolist in the long run would occur at a point where ATC is tangent to AR curve on the left.
Group Equilibrium
• Chamberlain defines : “ a group includes all those firms that produce closely related products i.e the products that have close technological and economic substitutes” • Products have a high price and cross elasticity. • Chamberlains heroic assumption that demand and cost curves for the products are uniform throughout the group. • Products are differentiated yet are close substitutes • Firms persue profit maximization both in the long run and short run
What Makes a Firm Successful?
• • – – • – – –
A firm can control some of the factors that allow it to make economic profits. Other factors are uncontrollable. Controllable factors include: The ability a firm has to differentiate its product. The ability to produce at a lower average total cost than competing firms. Uncontrollable factors include: Prices of inputs. Changes in consumer tastes. Chance events.
1. There are two important differences between long-run equilibrium perfect competition (PC) and monopolistic competition (MO).
– MO firms charge a price > MC. – MO firms do not produce at minimum ATC. – Since price > minimum ATC, productive efficiency is not achieved. MO firms have excess capacity.
• 2. Although consumers pay a price > MC under MO and the product is not being produced at minimum ATC, they benefit from being able to purchase products that are differentiated.
doc_831870901.pptx
defines and explains the features of monopolistic competition. It also explains Price and Output Determination in Monopolistic Competition.
Monopolistic Competition
Definition
• Monopolistic competition refers to a situation where there are many sellers of a differentiated products. • Many firms are making close substitutes but not perfect substitutes. • Products are differentiated each seller can sell independently decide his own price and output policies.
Characteristics
• Many number of sellers • Product differentiation – Advertisement – Patent rights and trade marks – Quality differentiation • Freedom of entry of the new firms and exit of the old firms • Higher elasticity of demand.
Price and Output Determination in Monopolistic Competition
• • • •
Given large number of buyers and sellers Independent action Some monopoly power due to product differentiation The firm will produce the level of output where MR=MC to maximize its profits. – The MR curve lies below the firm’s demand curve, the firm will maximize profits where price (P) > MC. – Profit = (P – ATC) x Q.
Profits in Long Run
• • Short-run profits give entrepreneurs an incentive to enter a market and establish new firms. The demand curve of an established firm shifts to the left and becomes more elastic as new firms enter the market. Entry will continue until the firm’s demand curve is tangent to its ATC curve. In the long run: – P = ATC and the firm breaks even (zero economic profit). – The firm’s demand curve is more elastic. Short-run losses mean firms will exit their market. As a result:
– – The demand curve for a firm remaining in the market shifts to the right and becomes less elastic. Exit continues until the representative firm can charge a price equal to ATC.
•
•
Excess Capacity
• The equilibrium of the firms occurs at an output less than the one at which average total cost is minimum. • The excess capacity theorem states that the equilibrium for the monopolist in the long run would occur at a point where ATC is tangent to AR curve on the left.
Group Equilibrium
• Chamberlain defines : “ a group includes all those firms that produce closely related products i.e the products that have close technological and economic substitutes” • Products have a high price and cross elasticity. • Chamberlains heroic assumption that demand and cost curves for the products are uniform throughout the group. • Products are differentiated yet are close substitutes • Firms persue profit maximization both in the long run and short run
What Makes a Firm Successful?
• • – – • – – –
A firm can control some of the factors that allow it to make economic profits. Other factors are uncontrollable. Controllable factors include: The ability a firm has to differentiate its product. The ability to produce at a lower average total cost than competing firms. Uncontrollable factors include: Prices of inputs. Changes in consumer tastes. Chance events.
1. There are two important differences between long-run equilibrium perfect competition (PC) and monopolistic competition (MO).
– MO firms charge a price > MC. – MO firms do not produce at minimum ATC. – Since price > minimum ATC, productive efficiency is not achieved. MO firms have excess capacity.
• 2. Although consumers pay a price > MC under MO and the product is not being produced at minimum ATC, they benefit from being able to purchase products that are differentiated.
doc_831870901.pptx