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    Chapter 14 - Parkin - PowerPoint

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    Monopolistic competition is characterized by many small firms with some power to set prices, product differentiation, and no barriers to entry in the long run. In the short run, firms determine price and output like a monopoly by producing where marginal revenue equals marginal cost. In the long run, entry and exit of firms leads to zero economic profit as firms have no incentive to stay if they are losing money. Firms spend heavily on advertising and branding to differentiate their products and signal quality to consumers in order to compete under monopolistic competition.

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    Chapter 14 - Parkin - PowerPoint

    Uploaded by

    Asande
    156 views10 pages
    Monopolistic competition is characterized by many small firms with some power to set prices, product differentiation, and no barriers to entry in the long run. In the short run, firms determine price and output like a monopoly by producing where marginal revenue equals marginal cost. In the long run, entry and exit of firms leads to zero economic profit as firms have no incentive to stay if they are losing money. Firms spend heavily on advertising and branding to differentiate their products and signal quality to consumers in order to compete under monopolistic competition.

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    Monopolistic competition is characterized by many small firms with some power to set prices, product differentiation, and no barriers to entry in the long run. In the short run, firms determine price and output like a monopoly by producing where marginal revenue equals marginal cost. In the long run, entry and exit of firms leads to zero economic profit as firms have no incentive to stay if they are losing money. Firms spend heavily on advertising and branding to differentiate their products and signal quality to consumers in order to compete under monopolistic competition.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    156 views10 pages

    Chapter 14 - Parkin - PowerPoint

    Uploaded by

    Asande
    Monopolistic competition is characterized by many small firms with some power to set prices, product differentiation, and no barriers to entry in the long run. In the short run, firms determine price and output like a monopoly by producing where marginal revenue equals marginal cost. In the long run, entry and exit of firms leads to zero economic profit as firms have no incentive to stay if they are losing money. Firms spend heavily on advertising and branding to differentiate their products and signal quality to consumers in order to compete under monopolistic competition.

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    You are on page 1of 10

    Monopolistic Competition

    Chapter 14

    Economics 3ed: Global and Southern African Perspectives © 2020 1


    Main ideas
    After studying this chapter, you will be able to:

    • Define and identify monopolistic competition


    • Explain how a firm in monopolistic competition determines its price and output
    in the short run and the long run
    • Explain why advertising costs are high and why firms use brand names in a
    monopolistically competitive industry

    Economics 3ed: Global and Southern African Perspectives © 2020 2


    What is Monopolistic Competition?
    Most real-world markets: competitive, but not perfectly competitive – firms have some
    power to set their prices (like monopolies).

    This type of market = Monopolistic Competition, characterised by:


    • Large number of firms:
    o Small market share
    o Ignore other firms
    o Collusion is impossible
    • Product differentiation
    • Competing on quality, price and marketing
    • Entry and exit:
    o No barriers to entry  zero long-run economic profit

    Economics 3ed: Global and Southern African Perspectives © 2020 3


    Price and Output in Monopolistic
    Competition
    Short-Run output and price decision
    • Firm in monopolistic competition
    makes its Q and P decision just like a
    monopoly firm
    • Goal: maximise economic profit –
    where MR = MC

    Economics 3ed: Global and Southern African Perspectives © 2020 4


    Price and Output in Monopolistic
    Competition
    Profit maximising might be loss
    minimising
    • Large economic profit is not inevitable.
    • Firm might face D that is too low for it
    to make an economic profit

    Economics 3ed: Global and Southern African Perspectives © 2020 5


    Price and Output in Monopolistic
    Competition
    Long run: Zero economic profit
    • No barriers to entry:
    o If firms are making economic
    profit, other firms have incentive
    to enter
    o When all firms are making zero
    economic profit: no incentive for
    new firms to enter
    o If firms incur economic losses,
    exit will occur

    Economics 3ed: Global and Southern African Perspectives © 2020 6


    Price and Output in Monopolistic
    Competition
    Monopolistic competition and perfect competition

    Economics 3ed: Global and Southern African Perspectives © 2020 7


    Product Development and Marketing
    Product development
    • Profit-maximising product
    development
    o Balance cost and revenue from
    development at the margin
    • Efficiency and product development
    o Efficiency when MSB of a
    new/improved product = MSC:
    Advertising
    • Advertising ensures consumers know
    about firm’s differentiated product
    • Advertising expenditure:
    o Increases TFC but can decrease
    ATC;
    o Changes demand for product

    Economics 3ed: Global and Southern African Perspectives © 2020 8


    Product Development and Marketing

    Economics 3ed: Global and Southern African Perspectives © 2020 9


    Product Development and Marketing
    Using advertising to signal quality
    • Advertising is a signal to the consumer of a high-quality product
    Brand Names
    • Provide information to consumers about quality of a product
    • Act as an incentive to the producer to achieve a high and consistent quality standard
    Efficiency of advertising and brand names
    • To the extent that advertising and brand names provide consumers with information
    about the precise nature of product differences and about product quality, they
    benefit the consumer and enable a better product choice to be made

    Economics 3ed: Global and Southern African Perspectives © 2020 10

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