1. Review 1.Identify the 4 market structures. 2.Identify the 3 types of market. 3.Identify 4 types of monopoly. 4.Explain why D is greater than MR in monopoly. 5.Define price discrimination. 6.List characteristics of perfect competition. 7.List monopoly characteristics. 8.Examples of non-price competition. 9.List three economies of scales. 10.Name 10 types of candy. 1

2. 2 Differentiated Products

3. Monopolistic Competition 3

4. 4 Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Characteristics of Monopolistic Competition:  Relatively Large Number of Sellers  Differentiated Products  Some control over price  Easy Entry and Exit (Low Barriers)  A lot of non-price competition (Advertising)

5. “Monopoly” + ”Competition” 5 Monopolistic Qualities: Control over price of own good due to differentiated product Demand is greater than MR Plenty of Advertising Not efficient Perfect Competition: Large number of smaller firms Relatively easy entry and exit Zero Economic Profit in Long-Run since firms can enter

6. Goods are NOT identical. Firms seek to capture a piece of the market by making unique goods. Since these products have substitutes, firms use NON-PRICE Competition. Examples of NON-PRICE Competition  Brand Names and Packaging  Product Attributes  Service  Location  Advertising (Two Goals) 1.Increase Demand 2.Make demand more INELASTIC 6 Differentiated Products

7. Drawing Monopolistic Competition 7

8. 8 Monopolistic Competition Quantity Price D MR MC Monopoly

9. Profit TR = TC 9 Monopolistic Competition is made up of prices makers so MR is less than Demand In the short-run, it is the same graph as a monopoly making profit Q Price P1P1 P LR In the long-run, new firms will enter & drive DOWN DEMAND for firms already in the market. Firms enter so demand falls until there is no economic profit Price and quantity falls and TR=TC In the LONG-RUN EQUILIBRIUM Quantity where MR=MC up to P=ATC Q LR / MR D MC D LR MR LR ATC Q1Q1 MR D

10. TR = TC Loss MR D MR LR MR 10 What happens when there is a loss? In the short-run, it is the same graph as a monopoly making a loss Q Price P LR P1P1 In the long-run, firms will leave & drive UP DEMAND for firms already in the market. /Q LR Q1Q1 Firms leave so demand increases until there is no economic profit Price and quantity increase and TR=TC D LR D MC ATC

11. Why does DEMAND shift?  New firms enter.  New firms mean more close substitutes and less market shares for each existing firm.  Demand for each firm falls.  Firms exit.  Result is less substitutes and more market shares for remaining firms.  Demand for each firm rises. 11

12. 12 Quantity Price MC Are Monopolistically Competitive Firms Efficient? LONG-RUN EQUILIBRIUM ATC Productively Efficient?Allocatively Efficient ? /Q SO /Q PE P LR Q LR D MR No, P ≠ MCNo, P ≠ Min ATC The firm can produce at a lower cost but it holds back production to maximize profit.

13. 1.Given current resources, the firm CAN produce at the lowest costs (min ATC) but they decide not to. 2.The output b/w the minimum ATC & the profit maximizing. 3.Not the amount under-produced. 13 Excess Capacity

14.  Large number of firms and product variation meets societies needs.  Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms. Ex: Nike might continue to make above normal profit because they are a well known brand. Advantages of MONOPOLISTIC COMPETITION 14

15. FOUR MARKET MODELS 15

16. 2002 AP Microeconomics Form B Question 1 Assume that two firms are operating with identical cost schedule, but one firm is in a perfectly competitive industry and the other is in a monopolistically competitive industry. (a)Using two correctly labeled graphs, show the long-run equilibrium price and output levels for each of these two firms. (b)Compare the long-run equilibrium and output levels for these two firms. (c)What level of economic profit will each firm earn in the long run? Why do these results occur? (d)For each of the two firms at the equilibrium quantity, indicate whether the firm’s demand curve is perfectly elastic, elastic, unit elastic, inelastic or perfectly inelastic. How can you tell? 16

17. Graphing 1.Draw the graph for a monopolistic competitive fast food restaurant making $400 total profit by selling 200 burgers at $4 each. Label D, MR, MC, Price, and Quantity. 2.Show shifts that will occur in the long-run and identify TR, TC, and profit. 17

18. Practice Question 18 Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would: A.have more economic profit. B.have a loss. C.also achieve allocative efficiency. D.be under producing. E.be in long-run equilibrium.