3.3.3 Monopolistic Competition: Graphical Presentation in the Short Run

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En provenance du cours de University of Pennsylvania

Microeconomics: When Markets Fail

245 notes

University of Pennsylvania

Microeconomics: When Markets Fail

245 notes

Perfect markets achieve efficiency: maximizing total surplus generated. But real markets are imperfect. In this course we will explore a set of market imperfections to understand why they fail and to explore possible remedies including as antitrust policy, regulation, government intervention. Examples are taken from everyday life, from goods and services that we all purchase and use. We will apply the theory to current events and policy debates through weekly exercises. These will empower you to be an educated, critical thinker who can understand, analyze and evaluate market outcomes.

À partir de la leçon

Monopoly Continued

Monopolies come in various types: one price monopoly, natural monopoly, price discrimination and monopolistic competition. This week we will expand the basic monopoly model to cover these cases and then explore market outcomes in each case. We will also discuss how government may intervene in such cases to benefit society as a whole and increase the surplus generated by the market.

3.2.1 Price Discrimination: Definition3:53

3.2.2 Price Discrimination: Graphical Example4:29

3.3.1 Monopolistic Competition: Definiton2:08

3.3.2 Monopolistic Competition: Core Results1:53

3.3.3 Monopolistic Competition: Graphical Presentation in the Short Run3:10

3.3.4 Monopolistic Competition: Graphical Presentation in the Long Run1:49

3.3.5 Monopolistic Competition: Mark up and Excess Capacity2:11

Rencontrer les enseignants

Rebecca Stein
Senior Lecturer
Economics

[MUSIC]

Let's model graphically the market structure of monopolistic competition.

Again, this is a market structure where we have many firms but

each of the firms is producing a slightly different product.

This is the market for a particular firm, for example,

a particular granola bar and they're facing a downward sloping demand curve.

Suggesting that they are substitutes to these granola bars but nonetheless,

some people would stick with this granola bar even if the price rose a little bit

and more people would want to purchase this granola bar if the price dropped.

Hence, a downward sloping demand curve.

The firm has an upward sloping marginal cost curve and

like all profit maximizing firms,

it will choose to produce where marginal cost is equal to marginal revenue.

Downward sloping demand means we have a downward sloping marginal revenue

that lies below it and the profit maximizing quantity can be found here.

This is the monopolist output and

we go up to the demand curve to find the monopolist price.

This seems just like a regular monopolist and

indeed in the short run, the firm could be making a profit.

Let me add an average total cost curve

that is consistent with the firm making a profit.

We can see the firm's profit, the difference between price and

average total cost times the quantity.

Here are the firm's profits, and this firm is a happy firm

but this firm is not going to be happy for long.

This firm is a monopoly but

don't forget, it is also partly a competitive environment.

Other firms look at this industry, they realize that this industry is

profitable and they have the option of entering the industry.

This is a model where we have free entry and exit.

What will happen as new firms enter the industry?

As new firms enter the industry, this particular firm,

this particular manufacturer of granola bars, will see their demand curve

shift in a little bit as some customers are siphoned off to the competition.

As the demand curve shifts in, so does the marginal revenue curve and

the firm has to readjust and think, what is the quantity that maximizes profit?

Let's think now what will this story look like in the long run?

Let's go ahead and do that.

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