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Market Price Discovery #2 Imperfect Competition

Market Price Discovery #2 Imperfect Competition. Monopolistic Competitors. Many sellers Ability to differentiate product by advertising and sales promotions Profits can exist in the short run, but others bid them away in the long run

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Market Price Discovery #2 Imperfect Competition

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  1. MarketPrice Discovery #2Imperfect Competition

  2. Monopolistic Competitors • Many sellers • Ability to differentiate product by advertising and sales promotions • Profits can exist in the short run, but others bid them away in the long run • Equate MC with MR, but price off the downward sloping demand curve

  3. Short run profits. The firm produces QSR where MR=MC at E above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay

  4. Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E.

  5. At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above…

  6. In the long run, profits are bid away as more firms enter the market. Or losses will no longer exist as firms leave the market. At QLR, the remaining firms are just breaking even as shown by the lack of gap between the demand curve and ATC curve.

  7. Monopolies • Only seller in the market. • Entry of other firms is restricted by patents, etc. • They have absolute power over setting market price. • They produce a unique product. • They can make economic profits in the long run because they can set price without competition.

  8. Total revenue is equal to the area 0PECQE, which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A), but then reads up to the demand curve (point C) when setting price PE.

  9. Total variable costs for the monopolist is equal to area 0NAQE, or the yellow box to the left.

  10. Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left…

  11. Total cost is therefore equal to area 0MBQE, or the green box plus the yellow box to the left.

  12. Finally, the economic profit earned by the monopolist is equal to area MPECB, or total revenue (blue box) minus total costs (green box plus yellow box).

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