1. Warm-Up Draw a correctly-labeled graph showing a:
Monopoly operating at a profit
Perfect competitor operating at long-run equilibrium

2. Intro to Monopolistic Competition
Chapter 16: Monopolistic Competition and Product Differentiation (pages )

3. Monopolistic Competition
Market structure where:
Many firms exist
Firms sell differentiated products
Free entry/exit
Lacks collusion

4. Graphing in the Short Run…
Similar to monopoly
Demand curve is more elastic
Has control over prices
MR=MC still holds

5. Graphing in the Short Run…
(a) A Profitable Firm
(b) An Unprofitable Firm
Price, cost, marginal revenue
Price, cost, marginal revenue MC MC A T C A T C P P
Profit
ATC U P
Loss
ATC U P D D P U MR MR P U Q
Quantity Q
Quantity P U
Profit-maximizing quantity
Loss-minimizing quantity

6. Moving to the Long Run (a) Effects of Entry (b) Effects of Exit
Price, marginal revenue
Price, marginal revenue
Entry shifts the existing firm’s demand curve and its marginal revenue curve leftward.
Exit shifts the existing firm’s demand curve and its marginal revenue curve rightward. D D 2 D MR MR D 1 MR MR 1 2 1 2 1 2
Quantity
Quantity

7. Price, cost, marginal revenue
Long Run
Price, cost, marginal revenue MC
Point of tangency A T C Z P = A T C MC MC D MR MC MC Q MC
Quantity

8. Similarities to the Past…
Perfect Competition
Monopoly
P = ATC
p = 0
MR = MC  optimum output
Many firms in market
Free entry/exit
Control over price (P>MC)
Downward-sloping demand

9. Comparing LR Equilibrium
(a) Long-Run Equilibrium in Perfect Competition
(b) Long-Run Equilibrium in Monopolistic Competition
Price, cost, marginal revenue
Price, cost, marginal revenue MC A T C MC A T C P = A T C MC MC P
= MC = D = MR = P PC PC PC A T C PC MC MC D MR MC MC Q Q PC
Quantity MC
Quantity
Minimum-cost output
Minimum-cost output

10. Differences from the Past…
Higher prices
Less output
Excess capacity
PPC < PMC
QMC < QPC
QMC < Min. ATC

11. Is LR Good or Bad? Inefficiency does exist Deadweight loss is created
P>MC
Some Beneficial trades don’t occur
Some benefits do exist

12. Is LR Good or Bad? Negatives Positives Inefficiency exists
Fewer firms would reduce TC
Goods are needlessly duplicated through variety
Variety gives consumers choices
Convenience is created

13. Forms of Differentiation
Typically based on either:
Style or type
Location
Quality
Industry with differentiated goods still has:
Competition among sellers
Value in diversity

14. Product Differentiation
Achieved most often through:
Advertising
Use of name brands

15. Why Differentiation Works …
People aren’t as rational as we think
Tastes go into people’s decisions
Not always based on “economic” thinking

16. Why Advertising Works…
Ads tell us something
There are LOTS of options
Celebrity endorsers tell us something about quality
Only good products can afford to pay celebrities