Monopoly Quiz Recap
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a) Assume that this profit-maximizing monopolist
is unregulated. Identify each of the following:
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i) The monopolist’s quantity of output
10
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ii) The monopolist’s price
$30
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iii) The profit earned by the monopolist
$150
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iv) The deadweight loss
$75
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b) Can the profit-maximizing monopolist continue
to earn profit in the long run?
Yes!
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= MR
c) Now assume that the monopolist can perfectly
price discriminate. Identify each of the following:
8
= MR
i) The quantity produced
20
9
= MR
ii) The profit earned by the monopolist
$250
10
= MR
iii) The consumer surplus
None!
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d) Now, assume instead that the monopolist
cannot price discriminate and is regulated to
produce the socially optimal (allocatively efficient)
quantity. Identify each of the following:
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i) The socially optimal quantity
20
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ii) The consumer surplus
$250
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e) Is the monopolist facing the regulation in part
(d) earning a positive economic profit, earning
zero economic profit, or incurring a loss?
Earning zero economic profit
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f) Now, assume instead that the monopolist
cannot price discriminate and is regulated to
produce the break-even (zero economic profit)
quantity. Identify each of the following:
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i) The monopolist’s quantity of output
20
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ii) The monopolist’s price
$15
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g) Is the dot marked by the delicious slice of
pecan pie on the elastic, inelastic, or unit elastic
portion of the demand curve?
elastic
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h) What is the
meaning of life?
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h) What is the meaning of life? ____________ pie
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Monopolistic
Competition
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Examples:
Everything
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Differentiated Products
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Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Characteristics of Monopolistic
Competition:
• Relatively Large Number of Sellers
• Differentiated Products
• Some control over price
• Easy Entry and Exit (Low Barriers)
• A lot of non-price competition
(Advertising)
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“Monopoly” + ”Competition”
Monopolistic Qualities
• Control over price of own good
due to differentiated product
• D greater than MR
• Plenty of Advertising
• Not efficient
Perfect Competition Qualities
• Large number of smaller firms
• Relatively easy entry and exit
• Zero Economic Profit in LongRun since firms can enter
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Differentiated Products
• Goods are NOT identical.
• Firms seek to capture a piece of the
market by making unique goods.
• Since these products have substitutes,
firms use NON-PRICE Competition.
Examples of NON-PRICE Competition
• Branding
• Unique Product Attributes
• Advertising (Two Goals)
1. Increase Demand
2. Make demand more INELASTIC
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Warm Up
1. What are the differences between
monopolistic competition and perfect
competition?
2. What are the differences between
monopolistic competition and monopoly?
3. What are the differences between
Donald Trump and
this dog?
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Graphing
Monopolistic
Competition
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Monopolistic Competition is made up of price
makers so MR is less than Demand
In the short-run, it is the same graph as a
monopoly making profit
P
MC
ATC
P1
In the long-run, new firms willDenter,
driving down the DEMAND for firms
already in the market.
MR
Q1
Q
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New firms enter => demand for firm’s
product falls until there is no economic
profit
P
MC
ATC
P1
D
MR
Q1
Q
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New firms enter => demand for firm’s product
falls until there is no economic profit
Price and quantity falls and TR=TC
P
MC
ATC
PLR
D
MR
QLR
Q
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LONG-RUN EQUILIBRIUM
Quantity where MR =MC up to Price = ATC
P
MC
ATC
PLR
D
MR
QLR
Q
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Why does DEMAND shift?
When short-run profits are made…
– New firms enter.
– New firms mean more close
substitutes and less market share for
each existing firm.
– Demand for each firm’s product falls.
When short-run losses are made…
– Firms exit.
– Result is fewer substitutes and larger
market share for remaining firms.
– Demand for each firm’s product rises.
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What happens when there is a loss?
In the short-run, the graph is the same as a
monopoly making a loss
ATC
P
MC
P1
D
In the long-run, firms will leave,
driving up the DEMAND for firms
already in the market.
MR
Q1
Q
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Firms leave so demand increases until
there is no economic profit
ATC
P
MC
P1
D
MR
Q1
Q
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Firms leave so demand increases until
there is no economic profit
Price and quantity increase and TR=TC
ATC
P
MC
PLR
D
MR
QLR
Q
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Side Note
The elasticity of demand for a
monopolistically competitive firm’s product
varies with the number of competitors:
If there are many competitors (and therefore
many substitutes), demand for the firm’s
product will tend to be more elastic
If there are fewer competitors and
substitutes, demand will tend to be less
elastic
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Are Monopolistically
Competitive Firms
Efficient?
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LONG-RUN EQUILIBRIUM
Not Allocatively Efficient because P  MC
Not Productively Efficient because not
producing at Minimum ATC
P
MC ATC
PLR
D
MR
QLR
QSocially Optimal
Q
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LONG-RUN EQUILIBRIUM
This firm also has EXCESS CAPACITY
P
MC ATC
PLR
D
MR
QLR
QSocially Optimal
Q
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Excess Capacity
• The firm can produce at the
lowest per unit cost (minimum
ATC) but it chooses not to.
• Excess capacity = the gap
between the minimum ATC
output and the profit maximizing
output.
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LONG-RUN EQUILIBRIUM
The firm can produce at a lower cost
but it holds back production to
maximize profit
P
MC ATC
PLR
D
Excess
Capacity
MR
QLR
QProd Efficient
Q
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Advantages of
MONOPOLISTIC COMPETITION
• Large number of firms and product
variation meets society’s needs.
• Nonprice Competition (product
differentiation and advertising) may
result in sustained profits for some
firms.
Ex: Nike might continue to make
above normal profit because they
are a well-known brand.
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