November 24, 2014
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Review HW: Activities 3-13, 3-14, 3-15
Lesson 3-9: Monopolistic Competition
HW: Activity 3-16
No Current Event this week!
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Monopolistic Competition
• A mixture of Perfect Competition and Monopoly
• Many firms sell similar but not identical products.
• Relatively large # of sellers (not nearly as much
as perfect competition)
• Firms determine their own output are price
makers.
• Slightly differentiated products (distinguish from
competition through reputation, customer
service, location, brand name, etc.)
• Examples: Retail clothing stores, restaurants,
computers, apartments, fast-food, etc.
• Easy entry and exit into industry
Monopolistic Competition
• Demand Curve downward sloping and MORE ELASTIC
than Monopoly: Lower price to attract more customers
due to competition.
• Marginal Revenue Curve is steeper and below Demand
Curve.
• In the Short Run: 4 profit outcomes:
1. Positive Total Profit
2. Break Even
3. Loss but Not Shut Down
4. Shut Down
• Firm MUST BREAK EVEN IN Long Run
Monopolistic competitors in the short run
(a) Firm makes profit
(b) Firm makes losses
Price
Price
MC
ATC
Price
MC
ATC
ATC
Price
ATC
Profit
Demand
Losses
Demand
MR
MR
0
Profitmaximizing
quantity
Quantity
0
Lossminimizing
quantity
Quantity
4
The Long Run: Only a Normal Profit
MC
Price and Costs
ATC
P= ATC
D
MR = MC
MR
0
Q3
Quantity
Productive inefficiency: P > min ATC
Allocative inefficiency: P > MC
LO2
11-5
Monopolistic Competition: Inefficiency
Price and Costs
MC
ATC
P= min
ATC
P)
Price is Lower
D
MR = MC
Excess Capacity at
Minimum ATC
0
MR
Qm Qe
Quantity
Monopolistic competition is not efficient
LO2
11-6