imperfect competition
The typical firm in the economy faces competition, but the competition is not so rigorous as to make the firm a price taker
oligopoly
a market structure in which only a few sellers offer similar or identical products
monopolistic competition
a market structure in which many firms sell products that are similar but not identical
concentration ratio
Economists measure a market's domination by a small number of firms. Percentage of total output in the market supplied by the four largest firms.
monopolistic competition describes a market with the following attributes
Many sellers, Product differentiation, Free entry and exit.
Type of Markets
The Monopolistically Competitive Firm in the Short Run
downward-sloping demand curve; produce the quantity at which marginal revenue equals marginal cost; uses its demand curve to find the price at which it can sell that quantity. [like Monopolist]
If price exceeds average total cost, so the firm makes a prof
A Monopolistic Competitor in the Short Run Curve
A Monopolistic Competitor in the Long Run
If firms are making profit, new firms enter, and the demand curves for the incumbent firms shift to the left. [new firm taken customers away from the existing firms]
If firms are making losses, old firms exit, and the demand curves of the remaining firms
A Monopolistic Competitor in the Long Run Curve
two characteristics describe the long-run equilibrium in a monopolistically competitive market
As in a monopoly market, price exceeds marginal cost. This conclusion arises because profit maximization requires marginal revenue to equal marginal cost and because the downward-sloping demand curve makes marginal revenue less than the price.
As in a com
differences between monopolistic and perfect competition: excess capacity and the markup
Excess Capacity [produces at higher than lowest ATC, Markup over Marginal Cost [causes deadweight loss]
Excess Capacity
entry and exit drive each firm in a monopolistically competitive market to a point of tangency between its demand and average-total-cost curves (downward slope region). the quantity of output at this point is smaller than the quantity that minimizes [lowe
Markup over Marginal Cost
Price exceeds marginal cost because the firm always has some market power.
The zero-profit condition ensures only that price equals average total cost. It does not ensure that price equals marginal cost.
In the long-run equilibrium, monopolistically compe
Would you like to see another customer come through your door ready to buy from you at your current price?" If you are perfectly competitive firm.
It didn't care. Because price exactly equals marginal cost, the profit from an extra unit sold is zero.
Would you like to see another customer come through your door ready to buy from you at your current price?" If you are monopolistic competitive firm
always eager to get another customer.
Because its price exceeds marginal cost, an extra unit sold at the posted price means more profit.
in a monopolistically competitive market, there are positive and negative externalities associated with the entry of new firms
1) The product-variety externality: Because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers.
2) The business-stealing externality: Because other firms lose custome
Monopolistic Competitors Demand and Cost curve in short run
Monopolistic Competitors Demand and Cost curve in long run
Monopolistic Competition is inefficient because
1) mark up over MC prevent a group of buyers who value the product more than MC but less the the price enjoying the product. - deadweight loss of monopoly.
2) producing at higher than lowest ATC
Whenever a new firm considers entering the market with a new product, it would causes two effects that are external to the firm.
1) The product-variety externality: Because consumers get some consumer surplus
from the introduction of a new product, entry of a new firm conveys a positive externality on consumers.
2) The business-stealing externality: Because other firms lose custome
Firms advertise because
When firms sell differentiated products and charge prices above marginal cost, each firm has an incentive to advertise to attract more buyers to its particular product.
Brand name
Critics argue that brand names are the result of an irrational consumer response to advertising.
Defenders argue that consumers have good reason to pay more for brand-name products
because they can be more confident in the quality of these products Benefi
Advertising as signal of quality
Kellogg signals the quality of its product by its
willingness to spend money on advertising. What the advertisements say is not as important as the fact that consumers know ads are expensive.
Advertising could make the product command higher price if
it can differentiate from the close competitors and create higher perceived value.to make demand more inelastic.
Advertising could make the product command lower price if
it attracts more customers so firm can charges lower price to cover its fixed cost.
Market structure comparison
The typical firm also has some degree of market power but unlike monopoly, this type of competition called
imperfect competition