Bài giảng topic 7(a) monopolisstic competition

Monopolistic Competition Topic 7(a) Contents 1. 2. 3. 4. 5. Characteristics of MC Short run profit maximisation Long run equilibrium Assessment of MC Product differentiation and Advertising Characteristics of MC  Large number of small firms   Differentiated products   so individual decisions have little or no impact on other firms’ decisions similar but not identical Low barriers to entry   low economies of scale low set-up costs Price and Output Determination The Firm’s Demand Curve in MC is:  Highly elastic, Why?    More close substitutes than a pure monopolist Not perfect substitutes (as is the case with perfect competition) Elasticity depends on   number of rivals degree of product differentiation Short-Run Price and Output Determination Rules for Profit maximization same as under Perfect Competition    MR = MC (where MC cuts MR from below) Short Run: P ≥ AVC Long Run : P ≥ ATC Short-Run Price and Output Determination: Short-Run Profits Price and Costs P MC Economic Profits AC D MR Q Q Short-Run Price and Output Determination: Short-Run Losses MC Price and Costs P ATC Losses D MR Q Q Long Run  How much to produce?   MR = MC Firms tend to break even, i.e. normal profit   Tangency solution: profit-maximising firm will produce an output when its demand curve is at a tangent to its ATC curve When ATC = Price Long run Equilibrium Long-Run Equilibrium  Why monopolistically competitive firms tend to break even in the long run?    Profits attract new entrants Losses encourage exits Some complications    Some product differentiation Some entry is partially restricted Some economic losses may be tolerated by firms in the long run Assessment of MC (vs. PC)  Higher price, lower output    P > MC   No allocative eff. P = AC   lower consumer surplus like monopoly like PC but P ≠ AC  No productive eff. Monopolistic Competition & Economic Efficiency  Productive inefficiency: Minimum ATC is not necessarily chosen   Allocative inefficiency:   excess capacity price does not necessarily equal MC Good feature  product variety Non-price Competition (ie. competition not based on price) Product differentiation: Real and/or perceived differences created by factors such as: quality, brands, service, location, advertising and packaging Advantages  More choice  Innovation => Better products  Avoid price war  Disadvantages  Too much choice?  Superficial product changes – waste of resources Non-price Competition Advertising Firm Advantages of Advertising  influences consumer preferences (the power of persuasion)  makes demand more price inelastic  Increases market power, market share Disadvantages of Advertising  Increases cost of production Non-price Competition – Advertising (cont.) Society Advantages of Advertising    Provides information Promotes competition Advertising revenue – cheaper media (television, newspapers etc) for users Disadvantages of Advertising     Misleading or false information Waste of resources if overall market demand stays constant Creates barriers to entry (financial, brand loyalty) Media bias towards advertisers [...]... consumer surplus like monopoly like PC but P ≠ min AC  No productive eff Monopolistic Competition & Economic Efficiency  Productive inefficiency: Minimum ATC is not necessarily chosen   Allocative inefficiency:   excess capacity price does not necessarily equal MC Good feature  product variety Non-price Competition (ie competition not based on price) Product differentiation: Real and/or perceived differences... resources Non-price Competition Advertising Firm Advantages of Advertising  influences consumer preferences (the power of persuasion)  makes demand more price inelastic  Increases market power, market share Disadvantages of Advertising  Increases cost of production Non-price Competition – Advertising (cont.) Society Advantages of Advertising    Provides information Promotes competition Advertising . Monopolistic Competition Topic 7(a) Contents 1. Characteristics of MC 2. Short run profit maximisation 3. Long run equilibrium 4 perfect competition)  Elasticity depends on  number of rivals  degree of product differentiation Short-Run Price and Output Determination Rules for Profit maximization same as under Perfect Competition  MR. inefficiency :  price does not necessarily equal MC  Good feature  product variety Non-price Competition (ie. competition not based on price) Product differentiation: Real and/or perceived differences