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Monopolistic Competition. Monopolistic Competition (m.c.). large number of independent sellers no or low barriers to entry differentiated product. differentiated products. products that are distinguished from similar products by such characteristics as quality, design, and location.

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monopolistic competition m c
Monopolistic Competition (m.c.)
  • large number of independent sellers
  • no or low barriers to entry
  • differentiated product
differentiated products
differentiated products

products that are distinguished from similar products by such characteristics as quality, design, and location.

examples: service stations, aspirin, tissues, retail stores

demand curve for the monopolistic competitor s product
Demand Curve for the Monopolistic Competitor’s Product

Since the product is differentiated, there is some brand loyalty and the firm has some control over price.

Since there are good substitutes available, however, the demand curve is fairly elastic.

slide5
The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product.

p.c. m.c. monopoly

P

P

P

D

D

D

Q

Q

Q

slide6
Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.
determine the tr pq box
Determine the TR = PQ box.

MC

$

ATC

P*

ATC*

MR

D

Q*

quantity

determine the tc atc q box
Determine the TC = ATC . Q box.

MC

$

ATC

P*

ATC*

MR

D

Q*

quantity

the difference between tr and tc is profit
The difference between TR and TC is profit.

MC

$

ATC

P*

ATC*

profit

MR

D

Q*

quantity

determine the tc atc q box18
Determine the TC = ATC . Q box

ATC

MC

$

AVC

ATC*

P*

MR

D

Q*

quantity

determine the tr pq box19
Determine the TR = PQ box.

ATC

MC

$

AVC

ATC*

P*

MR

D

Q*

quantity

profit maximizing output where mr mc directly below the tangency of d and atc
Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC)

MC

$

ATC

MR

D

Q*

quantity

determine the tr pq box25
Determine the TR = PQ box.

MC

$

ATC

ATC* = P*

MR

D

Q*

quantity

determine the tc atc q box26
Determine the TC = ATC . Q box.

MC

$

ATC

ATC* = P*

MR

D

Q*

quantity

since tr tc profit is zero
Since TR = TC, profit is zero.

MC

$

ATC

ATC* = P*

MR

D

Q*

quantity

possibilities for the monopolistic competitor
Possibilities for the Monopolistic Competitor

short run: positive profits, losses, or breaking even.

long run: breaking even.

similarities between perfect competition and monopolistic competition
Similarities between perfect competition and monopolistic competition
  • Profits must be zero in long run equilibrium.
  • Firms are responsive to changes in demand conditions.
  • Competition in the pursuit of profit encourages resource movements that are efficient.
differences between perfect competition and monopolistic competition
Differences between perfect competition and monopolistic competition
  • In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not.
  • For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC.
  • Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.
price discrimination
Price Discrimination

when a seller charges different prices to different consumers for the same product or service.

examples
Examples

Charging different prices for movie admission to students and senior citizens and to other customers is price discrimination.

Charging different prices for movie admission on a Wednesday afternoon and on a Saturday night is not price discrimination because the products are not the same.

requirements for price discrimination to occur
Requirements for Price Discrimination to Occur
  • Firm must have some control over price. (So perfect competitors can not price discriminate, but monopolistic competitors, monopolists, and oligopolists can.)
  • Firm must be able to separate consumers into different identifiable groups.
  • The different groups must have different elasticities.