Micro Chapter 23 Presentation 1 Monopolistic Competition

Micro Chapter 23 Presentation 1

Monopolistic Competition

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

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

Examples of Monopolistic Competition

• In metropolitan areas: Grocery Stores, gas stations, barbershops, dry cleaners, clothing stores, medical care, and real estate agencies

http://rds.yahoo.com/_ylt=A0WTb_69QIRLzUAA4qGJzbkF;_ylu=X3oDMTBpY2Y5NXNiBHBvcwM2BHNlYwNzcgR2dGlkAw--/SIG=1hq8ou195/EXP=1267044925/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dsimpsons%252Bgrocery%252Bstore%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=500%26h=375%26imgurl=farm4.static.flickr.com%252F3354%252F3203612202_68f939f831.jpg%26rurl=http%253A%252F%252Fwww.flickr.com%252Fphotos%252Fmalouie%252F3203612202%252F%26size=108k%26name=maggie%2Bsimpson%2Bs...%26p=simpsons%2Bgrocery%2Bstore%26oid=7b89aaa2d0b88a50%26fr2=%26fusr=malouie%26no=6%26tt=26%26sigr=11g13froo%26sigi=11mljaf41%26sigb=12r37j88m

http://rds.yahoo.com/_ylt=A0WTb_rfQIRLZh4AZBWJzbkF;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1jcr5fhj0/EXP=1267044959/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Ddustin%252Bdiamond%252Breal%252Bestate%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=185%26h=222%26imgurl=themortgagereports.com%252Fimages%252Fold%252Fphotos%252F2007%252F12%252F29%252Fsave_my_house_screech.jpg%26rurl=http%253A%252F%252Fthemortgagereports.com%252F2006%252F06%252Fscreechs_creati.html%26size=12k%26name=I%2Bcan%2Bt%2Bhelp%2Bbut...%26p=dustin%2Bdiamond%2Breal%2Bestate%26oid=2cdeec037702bc5a%26fr2=%26no=1%26tt=1%26sigr=11qgqa52l%26sigi=12dms64bc%26sigb=12vs51lgv

Product Differentiation

• One firm’s product is distinguished from competing products by means of design, related services, quality, location or other attributes

http://rds.yahoo.com/_ylt=A2KJkIb5CmNNGUMAJnyJzbkF;_ylu=X3oDMTBpc2ozM2gzBHBvcwM0BHNlYwNzcgR2dGlkAw--/SIG=1kd8bp9lt/EXP=1298365305/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dbilly%252Bmadison%252Bshampoo%2526sado%253D1%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%2526fr2%253Dsg-gac%26w=500%26h=521%26imgurl=static.funnyjunk.com%252Fpictures%252F3aaa34b8_bbcd_09b6.jpg%26rurl=http%253A%252F%252Fwww.funnyjunk.com%252Ffunny_pictures%252F586568%252FShampoo%252Bis%252Bbetter%252F%26size=78KB%26name=Shampoo%2Bis%2Bbette...%26p=billy%2Bmadison%2Bshampoo%26oid=279c3d386b939da81700e5e8a4dbd0cd%26fr2=sg-gac%26no=4%26tt=54%26sigr=121m7b2qo%26sigi=11kc4s3d9%26sigb=13c31a8h1%26.crumb=5pbImT2NOs0

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

http://rds.yahoo.com/_ylt=A0WTb_rEPYRLrlkArDOJzbkF;_ylu=X3oDMTBpaWhqZmNtBHBvcwMzBHNlYwNzcgR2dGlkAw--/SIG=1em4djq68/EXP=1267044164/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Ddell%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=410%26h=338%26imgurl=www.laptopblog.org%252Fimages%252Fdell_logo.jpg%26rurl=http%253A%252F%252Fes.famozz.com%252Fcompanies%252Fdell%26size=30k%26name=dell%2Blogo%2Bjpg%26p=dell%26oid=75c1204a9b103bd0%26fr2=%26no=3%26tt=13964814%26sigr=1133jvgfk%26sigi=117qoo8fa%26sigb=129kdhc6g

http://rds.yahoo.com/_ylt=A0WTb_jYPYRL9i8AiG.JzbkF;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1fl5bkvbg/EXP=1267044184/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dmac%252Bbook%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=280%26h=286%26imgurl=hosp2a.up.seesaa.net%252Fimage%252FApple20Mac20Book20White.jpg%26rurl=http%253A%252F%252Fadomail.biz%252Fapple%252Bmac%252Bbook%26size=26k%26name=Apple20Mac20Book...%26p=mac%2Bbook%26oid=4d591c01e5b5b1c2%26fr2=%26no=1%26tt=233388%26sigr=111csfhi7%26sigi=11m0jjq2n%26sigb=12d06vv0l

http://rds.yahoo.com/_ylt=A0WTb_0HPoRLKEMAUDWJzbkF;_ylu=X3oDMTBpY2Y5NXNiBHBvcwM2BHNlYwNzcgR2dGlkAw--/SIG=1kfh2s814/EXP=1267044231/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dlevin%252Bfurniture%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=504%26h=504%26imgurl=www.levinfurniture.com%252FFurnitureCatalog%252F15500_ACCENT_PIECES%252F1551_ROCKERS%252F2BAB_7001100_WEB.jpg%26rurl=http%253A%252F%252Fwww.levinfurniture.com%252FCatalog%252Fproduct_catalog_detail_base.aspx%253Fmajor%253DLVRM%2526minor%253DBASE%2526item%253D7001100%26size=62k%26name=2BAB%2B7001100%2BWEB...%26p=levin%2Bfurniture%26oid=0b64abe1e2d406c8%26fr2=%26no=6%26tt=825%26sigr=139qmibm4%26sigi=12ttj89id%26sigb=12k48ht3f


• 2. Service- helpfulness of clerks, reputation, turnaround on delivery

http://rds.yahoo.com/_ylt=A0WTb_yAPoRL83YA8keJzbkF;_ylu=X3oDMTBpc2VvdmQ2BHBvcwM3BHNlYwNzcgR2dGlkAw--/SIG=1hrlds4kl/EXP=1267044352/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dhyde%252Bpark%252Bsteakhouse%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=390%26h=500%26imgurl=farm3.static.flickr.com%252F2602%252F4222488782_91163cfc61.jpg%26rurl=http%253A%252F%252Fwww.flickr.com%252Fphotos%252Fdavehpics%252F4222488782%252F%26size=123k%26name=Hyde%2BPark%2BSteakh...%26p=hyde%2Bpark%2Bsteakhouse%26oid=65d0d090c25e1b5e%26fr2=%26fusr=tvDAVEpgh%26no=7%26tt=171%26sigr=11i6bpb46%26sigi=11mdviitq%26sigb=12ppec2vo

http://rds.yahoo.com/_ylt=A0WTb_6bPoRL.gkA.Z2JzbkF;_ylu=X3oDMTBpZTByOGFiBHBvcwMyBHNlYwNzcgR2dGlkAw--/SIG=1h17p41l2/EXP=1267044379/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dmcdonald%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=900%26h=823%26imgurl=www.beefjack.com%252Fwp-content%252Fuploads%252F2009%252F06%252Fronald_mcdonald_jumping1.jpg%26rurl=http%253A%252F%252Fwww.beefjack.com%252Ftag%252Fnintendo%252Fpage%252F4%26size=206k%26name=ronald%2Bmcdonald%2B...%26p=mcdonald%26oid=aedd0b519370e9d8%26fr2=%26no=2%26tt=2094939%26sigr=11b1dijej%26sigi=128cmpl0u%26sigb=12d0d4v05


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

http://rds.yahoo.com/_ylt=A0WTb_sGP4RLNjQAxGSJzbkF;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1euqtf4a1/EXP=1267044486/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253D711%252Blogo%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=650%26h=628%26imgurl=www.baboomenergyspray.com%252F711logo.jpg%26rurl=http%253A%252F%252Fwww.baboomenergyspray.com%252Fdownloads.html%26size=25k%26name=711logo%2Bjpg%26p=711%2Blogo%26oid=f411a99253239ae6%26fr2=%26no=1%26tt=7170%26sigr=11f9oqjt3%26sigi=115qbjapk%26sigb=12d6q0s60

http://rds.yahoo.com/_ylt=A0WTb_sXP4RLWlIAsfiJzbkF;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1h35ode8e/EXP=1267044503/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dgiant%252Beagle%252Blogo%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=1220%26h=706%26imgurl=www.gotrmagee.org%252Fcustomers%252F109032014143630%252Fimages%252FGiant%252520Eagle%252520logo.JPG%26rurl=http%253A%252F%252Fwww.gotrmagee.org%252F%26size=160k%26name=Giant%2BEagle%2Blogo...%26p=giant%2Beagle%2Blogo%26oid=98831a4636404f30%26fr2=%26no=1%26tt=107%26sigr=10pv786b4%26sigi=12b466f5i%26sigb=12la38ibn

http://rds.yahoo.com/_ylt=A0WTb_osP4RLRkIA37KJzbkF;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1iohijufh/EXP=1267044524/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dred%252Broof%252Binn%2526sado%253D1%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%2526fr2%253Dsg-gac%26w=1090%26h=798%26imgurl=www.visitnaperville.com%252Fstorage%252FRed-Roof-Inn.jpg%253F__SQUARESPACE_CACHEVERSION%253D1239295478717%26rurl=http%253A%252F%252Fwww.visitnaperville.com%252Fhotels%26size=67k%26name=Red%2BRoof%2BInn%2Bjpg...%26p=red%2Broof%2Binn%26oid=db01c6738a00cba8%26fr2=sg-gac%26no=1%26tt=22159%26sigr=1154o7ar2%26sigi=12pm01s7q%26sigb=1333vau4k

http://rds.yahoo.com/_ylt=A0WTb_phP4RLCCoA_amJzbkF;_ylu=X3oDMTBqaHBscmZmBHBvcwMxMwRzZWMDc3IEdnRpZAM-/SIG=1j6vnshe3/EXP=1267044577/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dturtle%252Bbay%252Bresort%2526sado%253D1%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%2526fr2%253Dsg-gac%26w=600%26h=417%26imgurl=www.explorers.co.uk%252Fnew_images%252Fworldwide%252Fturtle_head.jpg%26rurl=http%253A%252F%252Fwww.explorers.co.uk%252FworldwideDiving%252FPhilippines%252FTurtleBayResort.aspx%26size=119k%26name=turtle%2Bhead%2Bjpg%26p=turtle%2Bbay%2Bresort%26oid=bcc0c3773d53db30%26fr2=sg-gac%26no=13%26tt=19827%26sigr=12b8rjt7n%26sigi=11ouc4a31%26sigb=138nb1qj9

http://rds.yahoo.com/_ylt=A0WTb_q0P4RLp2kAJxeJzbkF;_ylu=X3oDMTBpdDZuNzZrBHBvcwM5BHNlYwNzcgR2dGlkAw--/SIG=1ilgsl68i/EXP=1267044660/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dinterstate%252B90%252Bcleveland%2526sado%253D1%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%2526fr2%253Dsg-gac%26w=800%26h=608%26imgurl=www.aaroads.com%252Fmidwest%252Fohio090%252Fi-090_wb_exit_175_03.jpg%26rurl=http%253A%252F%252Fwww.aaroads.com%252Fmidwest%252Fi-090wb_oh.html%26size=65k%26name=i%2B090%2Bwb%2Bexit%2B17...%26p=interstate%2B90%2Bcleveland%26oid=ff9f0b7ec683ef1c%26fr2=sg-gac%26no=9%26tt=499%26sigr=11e2201k1%26sigi=11ormrtv3%26sigb=13eohldkq


• 4. Brand Names and Packaging- Advil v. Generics

• Bottled water exclaiming “Pure Spring H2O”

• Use of celebrities to sell products

http://rds.yahoo.com/_ylt=A0WTb_07QYRLS3gARAyJzbkF;_ylu=X3oDMTBpZTByOGFiBHBvcwMyBHNlYwNzcgR2dGlkAw--/SIG=1holpn8hl/EXP=1267045051/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dshamwow%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=200%26h=205%26imgurl=www.blogcdn.com%252Fwww.tvsquad.com%252Fmedia%252F2009%252F03%252Fshamwow1.jpg%26rurl=http%253A%252F%252Fwww.yournewz.com%252Fnewsarchive%252F2009%252F03%252F28%252Fcategory%253D54%252Fsource%253D%252F0%252Fus%26size=9k%26name=shamwow1%2Bjpg%26p=shamwow%26oid=3f5807c4ba4574ca%26fr2=%26no=2%26tt=12946%26sigr=127odcump%26sigi=11q8qbcaj%26sigb=12c22hppi

http://rds.yahoo.com/_ylt=A0WTb_pRQYRLjEEALE2JzbkF;_ylu=X3oDMTBpZTByOGFiBHBvcwMyBHNlYwNzcgR2dGlkAw--/SIG=1fi7tof0c/EXP=1267045073/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dadvil%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=684%26h=473%26imgurl=www.drug3k.com%252Fimg2%252Fadvil_10398_6_%2528big%2529_.jpg%26rurl=http%253A%252F%252Fwww.drug3k.com%252Fdrug%252FAdvil-10398.htm%26size=104k%26name=advil%2B10398%2B6%2Bbi...%26p=advil%26oid=121d982f10433d06%26fr2=%26no=2%26tt=18735%26sigr=11aj854n7%26sigi=11csjskmh%26sigb=12aoki03u

http://rds.yahoo.com/_ylt=A2KJkIV9DWNNcAoAHcaJzbkF;_ylu=X3oDMTBqMGphbm9uBHBvcwMyMARzZWMDc3IEdnRpZAM-/SIG=1mi0fojpb/EXP=1298365949/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dmichael%252Bjordan%252Bads%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=597%26h=800%26imgurl=i.ebayimg.com%252F12%252F%2521BcdgLy%2521Bmk%257E%2524%2528KGrHqYH-EQEqv%252CdywINBK0kFfyD6w%257E%257E_3.JPG%26rurl=http%253A%252F%252Fcgi.ebay.ca%252FMICHAEL-JORDAN-23-WHEATIES-BOX_W0QQitemZ390104912454QQcmdZViewItemQQptZVintage_Sports_Memorabilia%253Fhash%253Ditem5ad4109246%26size=98KB%26name=MICHAEL%2BJORDAN%2B%2523...%26p=michael%2Bjordan%2Bads%26oid=5a2f29fa5366c8afb1c77d8263d88e9f%26fr2=%26no=20%26tt=16700%26sigr=148fulfg7%26sigi=12466044s%26sigb=12n9ko3ch%26.crumb=5pbImT2NOs0


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

http://rds.yahoo.com/_ylt=A2KJke1vDmNN70UAVMGJzbkF;_ylu=X3oDMTBqNzBoY2J0BHBvcwMxNARzZWMDc3IEdnRpZAM-/SIG=1lulsukv3/EXP=1298366191/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dlebron%252Bjames%252Bbillboard%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=600%26h=459%26imgurl=api.ning.com%252Ffiles%252Fktk3GCWJcrhzwC4tUjoNPy3FoxhY2CRz2Ygwyo-QL2Mv4sjSUoGn74I7MYNCe37YrgPaUuudGjqqRvpLUXHgvl%252ABkT1iWQSU%252Flebronsidekick.jpg%26rurl=http%253A%252F%252Fwww.thisis50.com%252Fprofiles%252Fblogs%252Ftheyre-still-mad-lebron-james%26size=33KB%26name=Still%2BMad%253A%2BLebro...%26p=lebron%2Bjames%2Bbillboard%26oid=5f09516f40669e8977a3d29964941d7e%26fr2=%26no=14%26tt=476%26sigr=124hdc7n2%26sigi=1466quo7g%26sigb=12rtdp3ed%26.crumb=5pbImT2NOs0


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

http://rds.yahoo.com/_ylt=A0WTbx6jDYVLDSsAu8uJzbkF;_ylu=X3oDMTBpc2VvdmQ2BHBvcwM3BHNlYwNzcgR2dGlkAw--/SIG=1i9fp2se0/EXP=1267097379/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Drolex%2526ei%253Dutf-8%2526fr%253Dyfp-t-701-s%26w=249%26h=250%26imgurl=www.demoroomtv.com%252Fimages%252Fcelebs%252Fsc19%252F58328%252Flarge_rolex_oyster_yachtmaster_ii.thumbnail.jpg%26rurl=http%253A%252F%252Fwww.demoroomtv.com%252F11-19-58328%252Fpictures%252Frolex_yacht_master_II.html%26size=19k%26name=rolex%2Byacht%2Bmast...%26p=rolex%26oid=32565d48799c886c%26fr2=%26no=7%26tt=1891968%26sigr=129novve9%26sigi=12r5k06l3%26sigb=12ck338jp

http://rds.yahoo.com/_ylt=A0WTb_naDYVL5nEAskuJzbkF;_ylu=X3oDMTBqNzBzNzJ2BHBvcwM1NgRzZWMDc3IEdnRpZAM-/SIG=1ihbmed5v/EXP=1267097434/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dtimex%2526b%253D41%2526ni%253D20%2526ei%253Dutf-8%2526xargs%253D0%2526pstart%253D1%2526fr%253Dyfp-t-701-s%26w=485%26h=366%26imgurl=www.tendenziosa.com%252Fwp-content%252Fuploads%252F2008%252F07%252Ftimex-80bis.jpg%26rurl=http%253A%252F%252Fwww.tendenziosa.com%252Fcategory%252Forologi%26size=42k%26name=timex%2B80bis%2Bjpg%26p=timex%26oid=9b4083b9d6e329bc%26fr2=%26no=56%26tt=298855%26b=41%26ni=20%26sigr=11bloifru%26sigi=11uho6hco%26sigb=1382qunp3

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

http://rds.yahoo.com/_ylt=A2KJkK0DD2NNM1AAdgSJzbkF;_ylu=X3oDMTBqMGphbm9uBHBvcwMyMARzZWMDc3IEdnRpZAM-/SIG=1ivea2ctn/EXP=1298366339/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dgumby%2526sado%253D1%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%2526fr2%253Dsg-gac%26w=481%26h=840%26imgurl=www.abc.net.au%252Freslib%252F201001%252Fr496303_2599209.jpg%26rurl=http%253A%252F%252Fwww.abc.net.au%252Fnews%252Fstories%252F2010%252F01%252F10%252F2788955.htm%26size=28KB%26name=Gumby%2Bwas%2Bthe%2Bou...%26p=gumby%26oid=6c0a86f27dd4d47a25a1e72e7de81d49%26fr2=sg-gac%26no=20%26tt=46200%26sigr=11pf1c15b%26sigi=11gnd1qoi%26sigb=12s44plgi%26.crumb=5pbImT2NOs0

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)

http://rds.yahoo.com/_ylt=A0WTbx7NFoVLNSsATBiJzbkF;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1f9tgpko8/EXP=1267099725/**http%3A//images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fimages.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Dprofit%2526ei%253Dutf-8%2526fr%253Dyfp-t-701%26w=199%26h=131%26imgurl=www.reengineerprofit.com%252Fimages%252Fprofit.jpg%26rurl=http%253A%252F%252Fwww.reengineerprofit.com%252FReferences.htm%26size=13k%26name=We%2Bunderstand%2Bth...%26p=profit%26oid=44e0a35b3483d0ac%26fr2=%26no=1%26tt=3690455%26sigr=11e0iegmv%26sigi=11a5kbub5%26sigb=12bkp3h6b

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

Price and Output DeterminationIn Monopolistic Competition

Short-Run Profits

Quantity

Pri

ce

an

d C

os

ts

MR = MC

MC

MR

D1

ATC

EconomicProfit

Q1

A1

P1

0

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

Price and Output DeterminationIn Monopolistic Competition

Short-Run Losses

Quantity

Pri

ce

an

d C

os

ts

MR = MC

MC

MR

D2

ATC

Loss

Q2

A2

P2

0

Quantity

Pri

ce

an

d C

os

ts

MR = MC

MC

MR

D3

ATC

Q3

P3=A3

0

Monopolistic Competition and Efficiency

Recall: P=MC=Minimum ATC

P4

Q4

Price is Higher

Excess Capacity atMinimum ATC

Monopolistic Competition is Not Efficient

Documents

Micro Chapter 23 Presentation 1 Monopolistic Competition