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Monopolistic Competition: The Competitive Model in a More Realistic
Setting
Chapter Summary
Most markets in Australia have many buyers and llers, low entry barriers and differentiated goods and rvices for sale. The are characteristics of monopolistic competition. Each monopolistically competitive firm faces a downward-sloping demand curve so marginal revenue is less than price. Firms maximi profit by producing the level of output that makes marginal revenue equal marginal cost. The firm may earn an economic profit or suffer an economic loss in the short run. Since there are low entry barriers, economic profits will cau new firms to enter the market. A firm that earns short-run profits will earn zero economic profit in the long run as entry from new firms shifts the firm’s demand curve to the left and caus it to become more elastic. If a firm suffers economic loss in the short run, other firms will exit the market and shift the firm’s demand curve to the right and cau it to become less elastic. In the long run, the firm’s demand curve will be tangent to its long-run average total cost curve, but average total cost will be greater than its minimum level.
Monopolistic competition and perfect competition differ in their long-run equilibrium positions. Monopolistically competitive firms charge a price greater than marginal cost and they do not produce at minimum average total cost. A monopolistically competitive firm has excess capacity. If it increas its output it could produce at a lower average cost. But consumers benefit from being able to purcha a product that is differentiated and more cloly suited to their tastes.
Firms can u marketing to differentiate their products. Marketing tools include brand management and advertising.
Learning Objectives
When you finish this chapter you should be able to:
1.Explain why a monopolistically competitive firm has a downward-sloping demand curve.
A monopolistically competitive firm is able to rai its price without losing all of its customers.
Some customers are willing to pay the higher price becau the firm has a favourable location, can offer better rvice or a higher quality product, among other reasons.
2.Explain how a monopolistically competitive firm decides the quantity to produce and the
奖励方案price to charge. All firms maximi profits by producing where marginal revenue is equal to marginal cost. Since price is greater than marginal revenue, a monopolistically competitive firm
Monopolistic competition: the competitive market in a more realistic tting 154 produces where price is greater than marginal cost. The firm will earn economic profits if its price exceeds average total cost in the short run.
3.Analy the situation of a monopolistically competitive firm in the long run. Since entry
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barriers are low in monopolistically competitive industries, short-run profits give entrepreneurs an incentive to enter the market and establish new firms. The entry of new firms will shift the demand curves of existing firms to the left and make them more elastic. If firms suffer short-run economic loss, some firms will exit the industry in the long run. This will shift the demand curves of remaining firms to the right and make them more inelastic. In the long run, the demand curve of a typical firm will be tangent to its average total cost curve.
4.Compare the efficiency of monopolistic competition and perfect competition. In the long run
the profit-maximising level of output for a monopolistically competitive firm occurs where price is gre
ater than marginal cost and the firm is not at the minimum point of its average total cost curve. Unlike a perfectly competitive firm, a monopolistically competitive firm does not achieve allocative efficiency or productive efficiency.
5.Define marketing and explain how firms u it to differentiate their products. Marketing低碳生活方式有哪些
refers to all the activities necessary for a firm to ll a product to consumers. Firms u brand management and advertising to earn profits and defend profits from competitors.
6.Identify the key factors that determine a firm’s profitability. The most important factors
under a firm’s control are its ability to differentiate its product and to produce at a lower average cost than competing firms. Other factors that affect profitability are not under a firm’s control.
The factors include the prices of the inputs it us in production and random chance. Chapter Review
Chapter Opener: Starbucks: Growth through Product Differentiation
Since the first Starbucks coffee shop opened in 1971, the firm has grown into a worldwide company.
But the growth has been in the number of shops, over 8,000, rather than the size of the shops themlves. Starbucks faces competition from other firms. Neighbourhoods often have three or more coffeehous. Barriers to entry into the market for coffeehous are low and firms differentiate their products by offering different menus and rvices.
Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market
Monopolistic competition is a market structure in which barriers to entry are low, and many firms compete by lling similar, but not identical, products. Production differentiation allows monopolistically competitive firms to rai their prices without losing all their customers. (A price increa will, however, cau some customers to switch to another similar product.)
The control monopolistically competitive firms have over their prices is limited becau they face competition from firms lling similar products. Since firms face downward-sloping demand curves when marginal revenue is less than price.
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Helpful Study Hint
Restaurants, convenience stores, bookstores and petrol stations are all examples of
monopolistically competitive firms. Petrol stations display their prices so that
differences between stations can easily be compared. Many motorists are willing to
buy at a slightly higher per litre price if a station is in a more convenient location than
a station that offers a lower price. Some consumers believe there are differences
between various brands of petrol. The customers are willing to pay a somewhat
higher price for what they perceive as a superior product. The next time you drive or
ride in a car, notice how much difference there is between the prices charged by the
stations you pass.
How a Monopolistically Competitive Firm Maximis Profits in the Short Run
As with firms in other markets, a monopolistically competitive firm will maximi profits by producing the level of output that makes marginal revenue (MR) equal to marginal cost (MC). Becau the MR curve lies below the firm’s demand curve, the firm will maximi profits where price (P) exceeds MC.
Helpful Study Hint
The table and graph in Figure 10.4 provide an example of a firm that makes a short-
run profit. Notice that (a) the relevant values for MR, MC and ATC are determined at比喻句
the profit-maximising quantity, or where MR=MC, (b) when firms earn profits the
ATC curve cross the demand curve at two points, and (c) at the profit maximising
output P > MR.
What Happens to Profits in the Long Run?
Short-run profits give entrepreneurs an incentive to enter a market and establish new firms. The demand curve of an established firm shifts to the left as new firms enter the market. Entry will contin
ue until the firm’s demand curve is tangent to its ATC curve. In the long run, the firm’s price will equal average total cost, the firm breaks even and the firm’s demand curve becomes more elastic.
Short-run loss will lead some firms to exit their market. As a result, the demand curve for a firm remaining in the market shifts to the right and becomes less elastic. The exit of firms continues until the reprentative firm can charge a price equal to the average total cost in the long run.
Monopolistic competition: the competitive market in a more realistic tting 156
Helpful Study Hint
This ction of the textbook contains veral features to help you understand the
transition of the market from short-run to long-run equilibrium. Don’t Let This
Happen to You! (pages 321-2) warns you not to confu economic and accounting
profit. Graphs in Figure 10.5 (page 320) illustrate the short run for a firm earning
profits and how the profits are eliminated in the long run firm. Table 10.2 (page
321) offers a comprehensive graphical summary of the short run and long run for a
monopolistically competitive firm. Making the Connection 10.1 (page 322) and
Solved Problem 10.2 (page 322) u the experience of Apple Computers to analy
the short run and long run under monopolistic competition. Making the Connection
10.2 describes the efforts of a cosmetics company to stay ahead of its competition.
Comparing Perfect Competition and Monopolistic Competition
红头文件There are two important differences between long-run equilibrium perfect competition and monopolistic competition. Monopolistically competitive firms charge a price greater than marginal cost and they do not produce at minimum average total cost. Since price exceeds marginal cost, allocative efficiency is not achieved, and since price is greater than minimum average total cost, productive efficiency is not achieved. Monopolistically competitive firms have excess capacity. Despite the characteristics, consumers benefit from purchasing products that are differentiated.
Helpful Study Hint
句子的英文
Although monopolistic competition appears to fall short of perfect competition in
terms of economic efficiency, the textbook rightly notes that consumers are willing to
我长大了诗歌朗诵pay for the variety offered by monopolistically competitive firms. Consider using
petrol stations once again as an example. Let’s say there are three petrol stations on a
single street corner. During most hours of the day at least one or two of the stations
are not busy; one can interpret this as excess capacity. But during rush hours all three
stations have customers. Enough drivers are willing to pay to keep all three stations
operating for the convenience of not waiting in long lines during peak hours.
Supermarkets offer another example of consumers’ willingness to pay for greater
convenience. Most supermarkets open additional check-out lines – some for
consumers with just a few items to buy – when long lines start to form.
How Marketing Differentiates Products
Firms can differentiate their products through marketing. Marketing refers to all the activities necessary for a firm to ll a product to a consumer. Firms u two marketing tools to differentiate their products. The first marketing tool is brand management. Brand management refers to the actions of a firm
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intended to maintain the differentiation of a product over time. Economic profits are earned when a firm introduces a new product, but this leads to the entry of firms producing similar products and the profits are eliminated. Firms u brand management to put off the time when they will no longer be able to earn profits. The cond marketing tool is advertising. Advertising shifts the demand curve for a product to the right and makes the demand curve more inelastic. Successful advertising allows the firm to ll more at every price. Advertising also increas costs. If the increa in revenue from advertising exceeds the costs, profits will ri.
Once a firm has established a brand name it has an incentive to defend it. Firms can apply for a trademark. A trademark grants legal protection against other firms using a product’s name. Companies will spend substantial amounts of money to ensure that their brand names are entitled to legal protection. If firms do not prevent the unauthorid u of their trademarks, they may be no longer entitled to legal protection.
What Makes a Firm Successful?
A firm can control some of the factors that allow it to make economic profits. Other factors are uncontrollable. Controllable factors include the ability a firm has to differentiate its product and the ability a firm has to produce at a lower average total cost than competing firms. Uncontrollable factors include input prices, changes in consumer tastes and random chance.
Solved Problem
Chapter 10 in the textbook includes two Solved Problems to support learning objectives 2 (“Explain how a monopolistically competitive firm decides the quantity to produce and the price to charge”) and 3 (“Analy the situation of a monopolistically competitive firm in the long run”). The following Solved Problem supports another of this chapter’s learning objectives.
Solved Problem 12-3 Supports learning objective 5: Define marketing and explain how firms u it to differentiate their products.
We Came. We Marketed. We Sold.
3Com Corporation was incorporated in the U.S. in 1979 and specialis in providing computer network devices such as routers and network switches. Among 3Com’s clients are business that want to improve the communication and curity capabilities of their computer systems. 3Com is not a houhold name in the manner of McDonald’s or Microsoft, but marketing is an important part of the company’s success. It faces stiff competition from other computer rvice providers, such as Cisco Systems, and us advertising and trademarks to influence its customers. 3Com’s advertising efforts are aimed primarily at computer network managers; for example, an advertising agency developed a two-page ad for 3Com titled “We Came. We Saw. We Routed.” Ads such as the are placed in publications most likely to be en by the target audience. It would be less effective for 3Com to place ads in People or Time magazines, since few of their readers are computer network managers, than it would be to adverti in business publications. The importance of establishing and maintaining 3Com’s trademarks is indicated by the guidelines the firm’s legal experts issue to employees. The following is a small sample of the guidelines for over 40 company and product tra
demarks:
Always U a Trademark as an Adjective, Followed by the Appropriate Description(s).
If not, the trademark could become generic…make sure that 3Com and the ® symbol
(3Com®) precedes a trademark mention of the product or rvice.
