Monopolistic Competition

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Presentation transcript:

Monopolistic Competition Market Structure More Competitive Less Competitive Perfect Competition Monopolistic Competition Oligopoly Monopoly PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Perfect Competition Many buyers and sellers Buyers and sellers are price takers Product is homogeneous Perfect mobility of resources Economic agents have perfect knowledge Example: Stock Market PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopolistic Competition Many sellers and buyers Differentiated product Perfect mobility of resources Example: Fast-food outlets PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Oligopoly Few sellers and many buyers Product may be homogeneous or differentiated Barriers to resource mobility Example: Automobile manufacturers PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopoly Single seller and many buyers No close substitutes for product Significant barriers to resource mobility Control of an essential input Patents or copyrights Economies of scale: Natural monopoly Government franchise: Post office PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Perfect Competition: Price Determination PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Perfect Competition: Short-Run Equilibrium Firm’s Demand Curve = Market Price = Marginal Revenue Firm’s Supply Curve = Marginal Cost where Marginal Cost > Average Variable Cost PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Perfect Competition: Short-Run Equilibrium PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Perfect Competition: Long-Run Equilibrium Quantity is set by the firm so that short-run: Price = Marginal Cost = Average Total Cost At the same quantity, long-run: Price = Marginal Cost = Average Cost Economic Profit = 0 PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Perfect Competition: Long-Run Equilibrium PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopoly Single seller that produces a product with no close substitutes Sources of Monopoly Control of an essential input to a product Patents or copyrights Economies of scale: Natural monopoly Government franchise: Post office PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopoly Short-Run Equilibrium Demand curve for the firm is the market demand curve Firm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR) Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopoly Short-Run Equilibrium PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopoly Long-Run Equilibrium PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Social Cost of Monopoly PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopolistic Competition Many sellers of differentiated (similar but not identical) products Limited monopoly power Downward-sloping demand curve Increase in market share by competitors causes decrease in demand for the firm’s product PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopolistic Competition Short-Run Equilibrium PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopolistic Competition Long-Run Equilibrium Profit = 0 PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Monopolistic Competition Long-Run Equilibrium Cost with selling expenses Cost without selling expenses PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.