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AP Economics

AP Economics. Mr. Bernstein Module 67: Introduction to Monopolistic Competition December 12, 2013. AP Economics Mr. Bernstein. Characteristics of Monopolistic Competition Like Perfect Competition: Many firms (too many to allow tacit collusion but fewer than Perfect Competition)

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AP Economics

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  1. AP Economics Mr. Bernstein Module 67: Introduction to Monopolistic Competition December 12, 2013

  2. AP EconomicsMr. Bernstein Characteristics of Monopolistic Competition • Like Perfect Competition: • Many firms (too many to allow tacit collusion but fewer than Perfect Competition) • No barriers to entry or exit • Like Monopoly: • Some ability to set pricing • Products differentiated • Examples • Local restaurants, retail groceries or clothing stores

  3. AP EconomicsMr. Bernstein Monopolistic Competition in the Short Run • D is downward sloping • In Short Run, set P and Q as a Monopoly would • Can earn profit in short run

  4. AP EconomicsMr. Bernstein Monopolistic Competition in the Short Run • Can also earn loss in short run

  5. AP EconomicsMr. Bernstein Monopolistic Competition in the Long Run • Entry and exit can occur in response to short-run profits or losses • Same adjustment process as Perfect Comp. • Firms will earn normal profit in the long run • P*=ATC, tangent to ATC (not at minimum…)

  6. AP EconomicsMr. Bernstein Monopolistic Competition vs. Perfect Competition • Normal profits in both (easy entry and exit) • MR=MC in both • In Perfect Comp, ATC=P=MR=MC, but in Monopolistic Comp ATC=P > MR=MC…on the downward sloping range of ATC • So Monopolistic Comp in not productively efficient (P=ATC min) and output is less than in Perfect Comp. Economists call this excess capacity

  7. AP EconomicsMr. Bernstein Is Monopolistic Competition Inefficient? • Since P>MC, DWL does occur • Because there is some competition, the wedge between P and MC is smaller than in monopoly • Differentiated products bring variety to consumers • Differentiated products also bring some pricing power to producers (the price of variety?)

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