Micro Chapter 23 Presentation 1

1. Micro Chapter 23 Presentation 1 Monopolistic Competition

2. Characteristics of Monopolistic Competition • 1. Relatively large number of sellers- 25, 50 not hundreds or thousands • 2. Differentiated Products-often by heavy advertising • 3. Easy Entry/Exit from the industry

3. Characteristics Continued • 4. Small market share • 5. No collusion (situation where firms act together in order to fix prices, divide a market, or otherwise restrict competition) • 6.Independent Actions- each firm can determine its own pricing policy

4. Examples of Monopolistic Competition • In metropolitan areas: Grocery Stores, gas stations, barbershops, dry cleaners, clothing stores, medical care, and real estate agencies

5. Product Differentiation • One firm’s product is distinguished from competing products by means of design, related services, quality, location or other attributes

6. Product Differentiation Examples • 1. Product Attributes- differences in functional features, materials, design and workmanship • Ex- PCs with different memory, speed etc. • Retail stores, furniture stores

7. Product Differentiation Examples • 2. Service- helpfulness of clerks, reputation, turnaround on delivery

8. Product Differentiation Examples • 3. Location- Convenient stores v. large grocery stores, Motels close to freeway exits

9. Product Differentiation Examples • 4. Brand Names and Packaging- Advil v. Generics • Bottled water exclaiming “Pure Spring H2O” • Use of celebrities to sell products

10. Product Differentiation Examples • 5. Advertising- to make price less of a factor in consumer purchases and make product differences a greater factor = Nonprice Competition

11. Product Differentiation Examples • 6. Some control over prices- if consumers prefer a certain brand, within limits, they will purchase the preferred product

12. Demand Curve • Monopolistic Competition has a highly but not perfectly elastic demand curve • Reasons: • 1. Few rivals • 2. Products are differentiated so they are not perfect substitutes

13. Profit • In the long run, only a normal profit will be earned • Normal profit- the payment made by a firm to obtain entrepreneurial ability (cost of doing business)

14. When Profits Occur • New firms enter the industry • Demand faced by existing curves shifts to the left (falls) because of new substitutes and reduces economic profits

15. Price and Output Determination In Monopolistic Competition Short-Run Profits ATC MC P1 A1 Price and Costs Economic Profit D1 MR = MC MR 0 Q1 Quantity

16. When Losses Occur • With SR losses, some firms will exit • With fewer substitutes, the existing firms will have demand curves shift to the right (up) and eventually they will earn normal profits

17. Price and Output Determination In Monopolistic Competition Short-Run Losses ATC MC A2 P2 Loss Price and Costs D2 MR = MC MR 0 Q2 Quantity

18. MC ATC P3= A3 Price and Costs D3 MR = MC MR 0 Q3 Quantity Monopolistic Competition and Efficiency Recall: P=MC=Minimum ATC P4 Price is Higher Excess Capacity at Minimum ATC Q4 Monopolistic Competition is Not Efficient