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KRUGMAN'S MICROECONOMICS for AP* Introduction to Monopolistic Competition Margaret Ray and David Anderson Micro: Econ: 31 67 Module
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What you will learn in this Module : How prices and profits are determined in monopolistic competition, both in the short run and in the long run. How monopolistic competition can lead to inefficiency and excess capacity.
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Monopolistic Competition Characteristics in common with perfect comp.: Many firms exist in the market, but not as many as perfect competition. There are no barriers to entry or exit. Characteristics in common with monopoly: The product is differentiated. Each firm has some ability to set the price of their product.
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Monopolistic Competition in the Short Run In the short run, monopolistic competitors set price and quantity in the same way a monopoly does. Monopolistic competitors can earn a profit in the short run.
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Monopolistic Competition in the Short Run Monopolistic competitors can also earn a loss in the short run. ATC
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Monopolistic competition in the Long Run Entry and exit occur in response to short-run profits or losses In the long run, Monopolistic competitors earn a normal profit
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Comparing Monopolistic Competition with Perfect Competition Economic profit = 0 (normal profit), so ATC=P in both due to entry and exit MR = MC in both (profit maximization rule) In perfect competition, ATC = P = MR = MC In monopolistic competition ATC = P > MR = MC Perfect competition achieves productive efficiency by producing at the minimum ATC Monopolistic competition results in excess capacity
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Is Monopolistic Competition Inefficient? Yes, P > MC so there is DWL (deadweight loss) BUT, variety (differentiated products) provides a benefit to consumers.
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Figure 67.1 The Monopolistically Competitive Firm in the Short Run Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers
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Figure 67.2 Entry and Exit Shift Existing Firms’ Demand Curves and Marginal Revenue Curves Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers
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Figure 67.3 The Long-Run Zero-Profit Equilibrium Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers
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Figure 67.4 Comparing Long-Run Equilibrium in Perfect Competition and Monopolistic Competition Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers
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