Read this chapter to learn about monopolistic competition. Make sure to distinguish the short-run from the long-run model. Monopolistic competitive markets are never efficient in any economic sense of the term. Discuss
the effect monopolistic competition has on overall market efficiency Monopolistically
competitive markets are less efficient than perfectly competitive markets. In terms of economic efficiency, firms that are in monopolistically competitive markets behave similarly as monopolistic firms. Both types of firms' profit maximizing production levels occur when their marginal revenues equals their marginal costs. This quantity is less than what would be produced in a perfectly competitive market. It also means that producers
will supply goods below their manufacturing capacity. Firms in a monopolistically competitive market are price setters, meaning they get to unilaterally charge whatever they want for their goods without being influenced by market forces. In these types of markets, the price that will maximize their profit is set where the profit maximizing production level falls on the demand curve.This price exceeds the firm's marginal costs and is higher than what the firm would charge if the market was
perfectly competitive. This means two things: Regardless of whether there is a decline in
producer surplus, the loss in consumer surplus due to monopolistic competition guarantees deadweight loss and an overall loss in economic surplus. Inefficiency in Monopolistic Competition: Monopolistic competition creates deadweight loss and
inefficiency, as represented by the yellow triangle. The quantity is produced when marginal revenue equals marginal cost, or where the green and blue lines intersect. The price is determined based on where the quantity falls on the demand curve, or the red line. In the short run, the monopolistic competition market acts like a monopoly. Productive and Allocative EfficiencyProductive efficiency occurs when a market is using all of its resources efficiently. This occurs when a product's price is set at its marginal cost, which also equals the product's average total cost. In a monopolistic competitive market, firms always set the price greater than their marginal costs, which means the market can never be productively efficient. Allocative efficiency occurs when a good is produced at a level that maximizes social welfare. This occurs when a product's price equals its marginal benefits, which is also equal to the product's marginal costs. Again, since a good's price in a monopolistic competitive market always exceeds its marginal cost, the market can never be allocatively efficient. This is “Review and Practice”, section 11.4 from the book Economics Principles (v. 1.0). For details on it (including licensing), click here. For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. To download a .zip file containing this book to use offline, simply click here. Has this book helped you? Consider passing it on: Creative Commons supports free culture from music to education. Their licenses helped make this book available to you. DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators. SummaryThis chapter examined the world of imperfect competition that exists between the idealized extremes of perfect competition and monopoly. Imperfectly competitive markets exist whenever there is more than one seller in a market and at least one seller has some degree of control over price. We discussed two general types of imperfectly competitive markets: monopolistic competition and oligopoly. Monopolistic competition is characterized by many firms producing similar but differentiated goods and services in a market with easy entry and exit. Oligopoly is characterized by relatively few firms producing either standardized or differentiated products. There may be substantial barriers to entry and exit. In the short run, a monopolistically competitive firm’s pricing and output decisions are the same as those of a monopoly. In the long run, economic profits will be whittled away by the entry of new firms and new products that increase the number of close substitutes. An industry dominated by a few firms is an oligopoly. Each oligopolist is aware of its interdependence with other firms in the industry and is constantly aware of the behavior of its rivals. Oligopolists engage in strategic decision making in order to determine their best output and pricing strategies as well as the best forms of nonprice competition. Advertising in imperfectly competitive markets can increase the degree of competitiveness by encouraging price competition and promoting entry. It can also decrease competition by establishing brand loyalty and thus creating barriers to entry. Where conditions permit, a firm can increase its profits by price discrimination, charging different prices to customers with different elasticities of demand. To practice price discrimination, a price-setting firm must be able to segment customers that have different elasticities of demand and must be able to prevent resale among its customers. Concept Problems
Numerical Problems
In what sense is monopolistic competition similar to monopoly?Like monopolies, the suppliers in monopolistic competitive markets are price makers and will behave similarly in the long-run. Also like a monopoly, a monopolistic competitive firm will maximize its profits by producing goods to the point where its marginal revenues equals its marginal costs.
How does a monopolistically competitive firm similar to a monopoly quizlet?Monopolistic competition is like a monopoly because firms face a downward-sloping demand curve, so price exceeds marginal cost. Monopolistic competition is like perfect competition because, in the long run, price equals average total cost, like free entry and exit drive economic profit to zero.
How is monopolistic competition like monopoly How is it different?A monopoly is a market structure where the participant is a single seller that dominates the overall market as he is offering a unique product or service. In contrast, monopolistic competition is a competitive market with only a handful of buyers and sellers who provide close substitutes.
What do monopolistic competition and monopolies have in common?Similarities between monopoly and monopolistic competition
2. Both have a downward-sloping demand curve: Both monopolists and monopolistic competitors have a downward-sloping demand curve, indicating that the price they charged and the quantity demanded are inversely related.
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