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This 5 page Bundle was uploaded by John Om on Monday April 25, 2016. The Bundle belongs to ECON 102 at Pennsylvania State University taught by Wayne Geerling in Winter 2016. Since its upload, it has received 11 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.
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Date Created: 04/25/16
Topic 12: Monopolistic Competition What is Monopolistic Competition? A market structure characterized by: o Free entry o Many different firms o Product differentiation Product differentiation o How firms make a product more attractive by contrasting its unique qualities with competing products Comparing Market Structures Perfectly Competitive Markets Monopolistic Competition Monopoly Many sellers Many sellers One seller Similar products Differential products A unique product without close substitutes Free entry and exit Free to entry and exit Barriers to entry and exit Product differentiation Style or type o Clothing stores o Food court at mall Location o Gas stations o Dry cleaner o Barber shops Quality: low quality vs. high quality o Tradeoff: quality vs. price Monopolistic Competition in the Short and Long Run Monopolistically Competition Firm o Sells a differentiated product o Has market power o Uses profit maximizing rule of MR=MC o Charges a price on the demand curve corresponding to this point & P > MC o Long run profits will depend on firm entry & exit (ATC NOT ON MINIMUM) Monopolistic Competition in the Long Run A key idea is free entry & exit If the industry is profitable, other firms will enter Demand for existing firms’ products will fall If the industry is experiencing losses, firms will exit Demand for remaining firms’ products will rise Entry & exit will stop when profits are zero This occurs when P = ATC Relationship between Price, Marginal Cost & LRAC Markup o The difference between P & MC o Markups are possible when a firm has market power & sells a differentiated product o Results in consumers paying more Scale and Output Excess capacity o Firms are relatively small o Not at the output level where ATC is minimized Why not produce more? o Firm would have to lower the price of output o It is more profitable to produce at excess capacity Compare to perfect competition o Output is lower Inefficiency and Social Warfare ATC are higher compared to perfect competition o Firm could lower the price it charges & sell more Markup o P > MC o If the firm tried to set P = MC o Level of output sold would occur where ATC > P o Firm would lose profits The Good about Advertising It increases demand The Bad about Advertising It increases costs Who advertises? Perfect competition o Homogenous products o Advertising won’t help an individual firm o Single firm that advertises would be at a cost disadvantage o Industry can still benefit from advertising Example Milk and Orange Juice Monopolistic competition o Advertising is widespread o Beneficial to individual firms with differentiated products o Advertising can increase demand for single firm’s product Example Fast food restaurants Clothing stores Monopoly o Not as necessary to advertise o Product has no close substitutes o May advertise simply to inform consumer about the product and stimulate demand Examples DeBeers
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