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MONOPOLISTIC COMPETITION

MONOPOLISTIC COMPETITION. A market form in which there is: 1) Product differentiation. 2) Many firms. 3) Easy entry and exit. The importance of monopolistic competition is that it seems to explain aspects of many important real world markets. SOME EXAMPLES. Shoe stores Pizza parlors

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MONOPOLISTIC COMPETITION

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  1. MONOPOLISTIC COMPETITION • A market form in which there is: • 1) Product differentiation. • 2) Many firms. • 3) Easy entry and exit. Monopolistic competition

  2. The importance of monopolistic competition is that it seems to explain aspects of many important real world markets. Monopolistic competition

  3. SOME EXAMPLES • Shoe stores • Pizza parlors • Fast food, in general • Local moving companies • Hand calculators • PC compatible clones • Others you can think of ... Monopolistic competition

  4. $/Q • The demand curve facing a monopolistically competitive firm looks very much like that facing a monopoly, but it is very elastic due to the presence of many close substitutes. D Q Greasy Sam’s Hamburgers Monopolistic competition

  5. Because the demand curve is negatively sloped marginal revenue must be less than average revenue. $/Q D Q Greasy Sam’s Hamburgers MR Monopolistic competition

  6. The short-run analysis of the monopolistically competitive firm proceeds exactly as for monopoly, because in the short-run entry and exit are not possible. Monopolistic competition

  7. With the the cost curves shown below, the firm can maximize profits by choosing output where MC = MR. $/Q AC MC p* D Q Q* MR Greasy Sam’s Hamburgers Monopolistic competition

  8. Profits are shown by the shaded area. $/Q AC MC p* D Q Q* MR Greasy Sam’s Hamburgers Monopolistic competition

  9. What happens in the long-run, as firms can enter or leave? The following hidden slide shows the process. $/Q AC MC p* D Q Q* Hidden slide MR Greasy Sam’s Hamburgers Monopolistic competition

  10. Do monopolistically competitive firms operate in society’s interest? Do they produce outputs and sell at prices which maximize surplus? Are the firms economically efficient? Monopolistic competition

  11. SUMMARY OF MONOPOLISTIC COMPETITION • 1) In the short-run firms choose price and output by setting MC = MR. • 2) In the long-run entry of new firms assures that profit will be zero. • 3) Some economic inefficiency exists because in equilibrium price is higher than marginal cost. Monopolistic competition

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