ECON Final: Monopolistic Competition

Long Run

-Economic profits tend towards 0 (mainly because of free entry) -If profits are greater than 0, new firms enter, lowering prices and profit -Demand becomes more elastic over time because there are more competitors When looking at a graph in the LR: If P=ATC, firms are earning a profit of zero -Demand shifts left when firms enter the market -Demand shifts right when firms exit the market *Until profit is zero -Firms are not minimizing costs in the LR

How is Monopolist Competition similar to Monopoly?

-Firm has a downward sloping demand curve -> but that demand is very elastic

Examples of Monopolistic Competition

-Food court -Fast food restaurants -Gas stations -Retail clothing -Downtown bars in State College -Hotels / motels

Product Differentiation

-Goods are similar and substitutable but NOT homogenous (identical) -Products can be differentiated by brand, quality, location -Firm has some control over price it charges -Firm faces a downward sloping demand curve, but it may be very elastic if competition is present -More differentiation = more control over price

Characteristics of Monopolistic Competition

-Large # of sellers (each firm is the only producer of its product, but there are many other firms that produce very similar items) -Differentiated products (a group of products that are similar enough to be considered the same product but different enough that they can be sold at different prices...ex. laundry detergents, beer, cars) -> this means that each firm will face a negatively/downward sloped and very elastic (but not perfectly elastic) demand curve. -Firms choose their prices-they are price makers or price setters -Advertising is necessary to differentiate their products from their competitors' -Low barriers to entry in the LR-> will cause profits to = 0 -P > MC at last unit sold, (but not by much)

Short Run

-Possible to make economic profits (losses are possible also) When looking at a graph in the SR: If P>ATC the firm is earning a profit

How is Monopolist Competition similar to Perfect Competition?

-Profit = 0 in the long run -P = ATC -Free entry (no barriers)

Implications of the large # of firms

-Small market share: b/c of great competition, each firm has a relatively small % of the market share -Lack of collusion: since there are so many firms in the market, it is hard for firms to work together/collude in monopolistic comp. -Relative independence: firms mostly ignore competitors when making price and output decisions (only pays closer attention to firms with the closest substitutes-> ex. Rolex is more concerned with high end watch companies than companies that sell cheap watches

Advertising

-The goal is to increase product demand, inform, persuade -Advertise if MR > MC

Each firm faces a ________ demand curve and if a firm wants to sell more units it will need to ______ the price.

Downward Lower

What does the demand curve look like in Monopolistic Competition?

It is negatively sloped, very elastic

Profit is maximized where...

MR = MC

What is the spectrum of market structures?

Perfect Competition-Monopolistic Competition-Oligopoly-Monopoly

More differentiation = more

Price Variation (The more that firms are able to differentiate their product from the competitors' product, the more control they will have over the price they charge)

In Monopolistic Comp., the firm has _____ control over the price it charges.

Some

Monopolistic Competition

There is a high degree of competition because of the large # of firms in the market, but each firm differentiates its products so it is like each firm has a monopoly on its own products. ex. There are lots of watches you can buy, but only Rolex sells Rolex watches -The models for Perf. Comp. and Monopoly work great in theory, but they don't reflect real life well like Monopolistic Comp. does

In Monopolistic Comp. goods are produced at a point where ATC _____at a minimum

is NOT