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MONOPOLISTIC COMPETITION

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MONOPOLISTIC COMPETITION A market form in which there is: 1) Product differentiation. 2) Many firms. 3) Easy entry and exit. The importance of monopolistic ... – PowerPoint PPT presentation

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Title: MONOPOLISTIC COMPETITION


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

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

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

4
  • 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.

/Q
D
Q
Greasy Sams Hamburgers
5
Because the demand curve is negatively sloped
marginal revenue must be less than average
revenue.
/Q
D
Q
Greasy Sams Hamburgers
MR
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.

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 Sams Hamburgers
8
Profits are shown by the shaded area.
/Q
AC
MC
p
D
Q
Q
MR
Greasy Sams Hamburgers
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 Sams Hamburgers
10
As new firms enter, the demand curve for this
firm shifts down.
/Q
AC
MC
D
Q
MR
Greasy Sams Hamburgers
11
  • Do monopolistically competitive firms operate in
    societys interest? Do they produce outputs and
    sell at prices which maximize surplus? Are the
    firms economically efficient?

12
Generally no, because price will be greater
than marginal cost. But because the demand curve
is likely to be very elastic, the difference
between P and MC may not be very great.
13
  • 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.
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