Monopolistic Competition Flashcards
The two extremes? The two in between the extremes?
Extremes: Monopoly and perfectly competitive market In between:
oligopoly: only a few sellers offer similar or identical products
monopolistic competition: many firms sell similar but not identical products.
In the short run, a monopolistic competition..
What about in the long run?
The mono compet.’s firm behaviour is very similar to monopoly.
In the long run, entry and exit drive economic profit to zero.
Losses in short run, supply curve shifts left, price rises, and some firms exit the market.
What are three characteristics of a monopolistic competitive market?
- free entry and exit
- many sellers
- products sold are similar but not identical
What are the external effects from entry of new firms to incumbent(necessary, or existing) firms?
And what are the definitions of these external effects?
The product-variety externality-surplus consumers get from the introduction of new products(postiive externality)
The business stealing externality-losses incurred by existing firms when new firms enter market(negative externality)
What does the monopolistically competitive graph look like when the firm is earning profits (in the SR)?
When MR
The ATC curve(around the minimum) would be below P (P is essentially the demand curve)
When they earn profit, P-ATC(profit - average total cost) is their earnings.
When does a monopolistically competitive market have losses in the short run?
When the average total cost curve is above P(essentially the demand curve). P<atc></atc>
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<p>So when you calculate profit, it would be ATC-P which is negative. The best a firm can do in this case is minimize losses.</p>
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Short run:Under monopolistic competitioin, firm behavior is similar to a monopoly
Long run: In monopolistic competition, entry and exit drive…
- if there are profits in the short run…
- if there are losses in the short run…
economic profit to zero.
- PROFITS:then firms would enter the market taking some demand away from existing firms which makes price and profit fall(D curve shifts left).(business stealing externality:existing firms incur losses from the entry of new firms)
- LOSSES: some firms will exit the market remaining firms enjoy higher demand and prices(D curve shifts right)
Plus, remember that here we cannot compare monopolistic competition to monopolies since monopolies have a hard time exiting the market(they are the only firm in the market, so why would they exit if they were making the big bucks?)
What happens to monopolistic competition market in the Long run?
Entry and exit occurs until P=ATC and profit=0
When this happens, firms will not charge at the MC but instead charge where P=ATC(remember, this is not that the minimum ATC so they are making some extra dough). The gap between MC and P=ATC is known as markup. The markup is the flaw in this type of market.
Why is monopolistic competition less efficient than a perfectly competitive market? (Hint: there are two reasons)
- Excess capacity: Remember that in the long run, entry and exit will happen until economic profit is 0, and P=ATC. Once this happens, the firms will start selling where P=ATC(not the minimum ATC), based on the Q where MR=MC. Because they are not producing at where MC=minimum ATC, they produce less than if they produced at the ATC minimum.
- in a perfectly competitive market, firms will produce where MC=minimum ATC (ATC is minimized) - Markup over marginal cost:
- under monopolistic competition, P>MC
- under a perfectly competitive market, P=MC
Because P>MC, the market quantity is below the socially efficient quantity. Explain why this is.
The socially efficient quantity is where MC=minimum ATC. Since in monopolistically competitve markets produce above the MC, they are not efficient
The inefficiencies that monopolistically competitive markets have is hard to measure and therefore hard for policy makers to improve the amrket outcome.
In advertising, if the govt protection of trademarks is eliminated,
this would reduce influence of brand names and result in lower prices.
