Micro Chapter 23 Presentation 1 - PowerPoint PPT Presentation

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Micro Chapter 23 Presentation 1

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Micro Chapter 23 Presentation 1 Monopolistic Competition ... Service- helpfulness of clerks, reputation, turnaround on delivery Product Differentiation Examples 3. – PowerPoint PPT presentation

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Title: Micro Chapter 23 Presentation 1


1
Micro Chapter 23 Presentation 1
  • Monopolistic Competition

2
Characteristics of Monopolistic Competition
  • 1. Relatively large number of sellers- 25, 50 not
    hundreds or thousands
  • 2. Differentiated Products-often by heavy
    advertising
  • 3. Easy Entry/Exit from the industry

3
Characteristics Continued
  • 4. Small market share
  • 5. No collusion (situation where firms act
    together in order to fix prices, divide a market,
    or otherwise restrict competition)
  • 6. Independent Actions- each firm can determine
    its own pricing policy

4
Examples of Monopolistic Competition
  • In metropolitan areas Grocery Stores, gas
    stations, barbershops, dry cleaners, clothing
    stores, medical care, and real estate agencies

5
Product Differentiation
  • One firms product is distinguished from
    competing products by means of design, related
    services, quality, location or other attributes

6
Product Differentiation Examples
  • 1. Product Attributes- differences in functional
    features, materials, design and workmanship
  • Ex- PCs with different memory, speed etc.
  • Retail stores, furniture stores

7
Product Differentiation Examples
  • 2. Service- helpfulness of clerks, reputation,
    turnaround on delivery

8
Product Differentiation Examples
  • 3. Location- Convenient stores v. large grocery
    stores, Motels close to freeway exits

9
Product Differentiation Examples
  • 4. Brand Names and Packaging- Advil v. Generics
  • Bottled water exclaiming Pure Spring H2O
  • Use of celebrities to sell products

10
Product Differentiation Examples
  • 5. Advertising- to make price less of a factor in
    consumer purchases and make product differences a
    greater factor Nonprice Competition

11
Product Differentiation Examples
  • 6. Some control over prices- if consumers prefer
    a certain brand, within limits, they will
    purchase the preferred product

12
Demand Curve
  • Monopolistic Competition has a highly but not
    perfectly elastic demand curve
  • Reasons
  • 1. Few rivals
  • 2. Products are differentiated so they are not
    perfect substitutes

13
Profit
  • In the long run, only a normal profit will be
    earned
  • Normal profit- the payment made by a firm to
    obtain entrepreneurial ability (cost of doing
    business)

14
When Profits Occur
  • New firms enter the industry
  • Demand faced by existing curves shifts to the
    left (falls) because of new substitutes and
    reduces economic profits

15
Price and Output Determination
In Monopolistic Competition
Short-Run Profits
ATC
MC
P1
A1
Price and Costs
Economic Profit
D1
MR MC
MR
0
Q1
Quantity
16
When Losses Occur
  • With SR losses, some firms will exit
  • With fewer substitutes, the existing firms will
    have demand curves shift to the right (up) and
    eventually they will earn normal profits

17
Price and Output Determination
In Monopolistic Competition
Short-Run Losses
ATC
MC
A2
P2
Loss
Price and Costs
D2
MR MC
MR
0
Q2
Quantity
18
Monopolistic Competition and Efficiency
  • Recall PMCMinimum ATC

P4
Price is Higher
Excess Capacity at Minimum ATC
Q4
Monopolistic Competition is Not Efficient
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