Microeconomics ECON 2302 Spring 2010 Marilyn Spencer, Ph.D. Professor of Economics Chapter 12

Reviewing Learning Objectives from Chapter 11. You should be able to: Define a perfectly competitive market, and explain why a perfect competitor faces a horizontal demand curve. Explain how a perfect competitor decides how much to produce. Use graphs to show a firm’s profit or loss. Explain why firms may shut down temporarily. Explain how entry and exit ensure that firms earn zero economic profit in the long run. Explain how perfect competition leads to economic efficiency.

Any questions on these topics? Anything else?

Midterm Grades I am required to submit midterm grades by Friday. At this point, I have scores for 25% to just over 37% of the course on each of you. So your midterm grade is based on only that small amount of information. In calculating your midterm grade, I will include 60% of the extra credit you’ve earned so far.

Chapter 12. Monopolistic Competition: the Competitive Model in a More Realistic Setting

After studying this chapter, you should be able to: Explain why a monopolistically competitive firm has a downward-sloping demand curve. Explain how a monopolistically competitive firm decides the quantity to produce and the price to charge. Analyze the situation of a monopolistically competitive firm in the long run. Compare the efficiency of monopolistic competition and perfect competition. Define marketing and explain how firms use it to differentiate their products. Identify the key factors that determine a firm’s profitability. 1 2 3 LEARNING OBJECTIVES 4 5 6

Monopolistic Competition: The Competitive Model in a More Realistic Setting Monopolistic competition A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.

LEARNING OBJECTIVE 1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market The Demand Curve for a Monopolistically Competitive Firm 12 - 1 The Downward-Sloping Demand for Caffe Lattès at a Starbucks

Marginal Revenue for a Firm with a Downward-Sloping Demand Curve Demand and Marginal Revenue at a Starbucks 12 – 1 Marginal Revenue for a Firm with a Downward-Sloping Demand Curve CAFFÈ LATTES SOLD PER WEEK (Q) PRICE (P) TOTAL REVENUE (TR = P x Q) AVERAGE REVENUE (AR – TR/Q) MARGINAL REVENUE (MR = ΔTR/ΔQ) 1 2 3 4 5 6 7 8 9 10 $6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 $0.00 10.00 13.50 16.00 17.50 18.00 - $5.50 0.50 -0.50 -1.50 -2.50 -3.50

Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 12 - 2

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve

How a Monopolistically Competitive Firm Maximizes Profits in the Short Run LEARNING OBJECTIVE 2 12 - 4 Maximizing Profit in a Monopolistically Competitive Market

What Happens to Profits in the Long Run? LEARNING OBJECTIVE 3 What Happens to Profits in the Long Run? How Does Entry of New Firms Affect the Profits of Existing Firms? 12 - 5 How Entry of New Firms Eliminates Profits Don’t Confuse Zero Economic Profit with Zero Accounting Profit

How Does Entry of New Firms Affect the Profits of Existing Firms? (cont.) 12 – 2 The Short Run and the Long Run For a Monopolistically Competitive Firm

The Rise and Fall of Apple’s Macintosh Computer 12 - 1 The Rise and Fall of Apple’s Macintosh Computer Macintosh lost its differentiation, but still has a loyal – if small – following.

The Short Run and the Long Run for the Macintosh 12-2 LEARNING OBJECTIVE 3 The Short Run and the Long Run for the Macintosh

What Happens to Profits in the Long Run? Is Zero Economic Profit Inevitable in the Long Run? A firm’s profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

12 - 2 Staying One Step Ahead of the Competition: Eugène Schueller and L’Oréal Unlike many monopolistically competitive firms, L’Orèal has earned economic profits for a very long time.

Comparing Perfect Competition & Monopolistic Competition LEARNING OBJECTIVE 4 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition 12 - 6

Comparing Perfect Competition and Monopolistic Competition Excess Capacity under Monopolistic Competition The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve. How Consumers Benefit from Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

Abercrombie and Fitch: Can the Product Be Too Differentiated? 12 - 3 Abercrombie and Fitch: Can the Product Be Too Differentiated? Did Abercrombie and Fitch narrow its target market too much?

How Marketing Differentiates Products LEARNING OBJECTIVE 5 How Marketing Differentiates Products Marketing All the activities necessary for a firm to sell a product to a consumer. Brand Management Brand Management The actions of a firm intended to maintain the differentiation of a product over time.

What Makes a Firm Successful? LEARNING OBJECTIVE 6 What Makes a Firm Successful? 12 - 7 What Makes a Firm Successful?

Monopolistic Competition Excess capacity Marketing Brand management

ANNOUNCEMENT We will not hold class on Thurs., April 1. (This is not an April Fools joke!) During that time, work on: Research papers, due April 15 Teaching papers, due April 22

Assignment for April 6: Pre-read Ch. 13, including: Review Questions: p. 464, 1.1 – 1.3; p. 466, 2.1, 2.3, 2.4 & 2.5 (1st edition: 1-4, 6-8 & 10 on pp. 436-43), and Problems and Applications: p. 465, 1.10; p. 466, 2.6, 2.7 & 2.10; p. 467, 2.17; p. 468, 2.19; and: The city is considering auctioning licenses that would allow one or two vendors to sell ice cream on the local beach. If the city licenses two vendors, will it receive more in total license fees than if it sells a license to only one vendor? Will people who use the beach be better off if the city licenses two vendors or one vendor? Suppose the city licenses two vendors but announces that every year it will sell licenses to two new vendors. The same vendor may not hold a license more than once every five years. Would this make any difference to the prices the vendors change? (1st edition: 1, 2, 3, 4, 11, 15 & 21 on pp. 437-440).

2nd Exam – March 30 We will review March 25. Same format as the 1st exam