Lecture: Monopolistic Competition

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2 Apr 2012
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© 2010 Pearson Education Canada
The firm in monopolistic
competition operates like
a single-price monopoly.
The firm produces the
quantity at which MR
equals MC and sells that
quantity for the highest
possible price.
It earns an economic profit
(as in this example) when
P > ATC.
Price and Output in Monopolistic
Competition
MICROECONOMICS
Monopolistic Competition
Overview
- price and output decisions in the long run and the short run
- advertising costs and the importance of brand names
Introduction
- monopolistic competition: market structure defined by:
o large number of competing firms
each firm has small market share limited influence on product
price
each firm sensitive to average market price, but no firm pays
attention to others’ actions
no one firm’s actions directly affect the actions of others
collusion: conspiring to fix prices; impossible in this competition
o differentiated products
each firm makes a slightly different product than competing firms
marketing required
o competition based on quality, price, and marketing
demand for each firm’s product is downward sloping tradeoff
between price and quality
o free entry and exit
firms cannot make an economic profit in the long run
- examples: AV equipment, clothing, jewelry, computers, sporting goods
Price and Output
Short Run Decisions
- firm has decided quality of product and marketing program
- firm operates as a single-price monopoly
o firm produces at profit-maximizing quantity (PMQ) MR = MC
o price determined from demand curve for firm’s product
highest price that the firm can charge for the PMQ
o earns economic profit when P > ATC
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Profit Maximizing vs. Loss Minimizing
- firm might incur economic loss in the short run at profit-maximizing point
o P < ATC
- most efficient point is the point at which loss is minimized
Long Run Decisions
- long run equilibrium occurs when P = ATC and economic profit is zero
o occurs because economic profit entry and economic loss exit
© 2010 Pearson Education Canada
Profit Maximizing Might
Be Loss Minimizing
A firm might incur an
economic loss in the short
run.
Here is an example.
At the profit-maximizing
quantity, P < ATC and the
firm incurs an economic
loss.
Price and Output in Monopolistic
Competition
© 2010 Pearson Education Canada
Figure 14.3 shows a
firm in monopolistic
competition in long-run
equilibrium.
Price and Output in Monopolistic
Competition
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