Week 4 Part 2 Monopolistic Competition PDF

MGMG506 Thai Economy in Global Context Slide: 4-2 Monopolistic Competition  Book Chapter 16: Monopolistic Competition Pow...

MGMG506 Thai Economy in Global Context Slide: 4-2 Monopolistic Competition  Book Chapter 16: Monopolistic Competition PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 2 product or service or otherwise on a password-protected website for classroom use.  Monopolistic Competition Monopolistic competition – Imperfect competition: between perfect competition and monopoly – Many sellers (มีผูขายมากราย จํานวนมากจนกระทั่งพฤติกรรมของผูขายรายหนึ่งไมมีผลกระทบตอ รายอื่นๆ) – Differentiated products (ขายสินคาอยางเดียวกัน แตไมเหมือนกัน เชน สบูลางหนาแบบมีฟอง กับไมมีฟอง ยาสีฟน แบบบีบมากบีบนอย) Not price takers, but price makers (ผูขายแตละรายตั้งราคาเองได) Downward sloping demand curve (เสน demand ลาดลงและแบนราบ ยืดหยุนมาก) – Free entry and exit (firms เขาออกไดอยางเสรี ในระยะยาวกําไรทางเศรษฐศาสตรเทากับศูนย) Zero economic profit in the long run 3  Short Run Equilibrium Profit maximization – Produce the quantity where MR = MC (ผลิตจุดที่ MR ตัดกับ MC) – Price: on the demand curve (ราคาที่กําหนดจะอยูบนเสน demand) – If P > ATC: profit (ถาตั้งราคาสูงกวา ATC จะไดกําไร มีคนเขามามากขึ้น) – If P < ATC: loss (ถาตั้งราคาต่ํากวา ATC จะขาดทุน มีคนออกไปจากตลาด) – Similar to monopoly (ผูขายกําหนดราคาบนเสน demand เลือกปริมาณ ผลิตที่กําไรสูงสุด คลายกับตลาดผูกขาด) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 4 product or service or otherwise on a password-protected website for classroom use. Figure 2 Monopolistic Competitors in the Short Run (a) Firm makes profit (b) Firm makes losses Price Price MC MC ATC ATC ATC Price ATC Price Profit Demand Losses Demand MR MR 0 Profit-maximizing Quantity 0 Loss-minimizing Quantity quantity quantity Monopolistic competitors, like monopolists, maximize profit by producing the quantity at which marginal revenue equals marginal cost. The firm in panel (a) makes a profit because, at this quantity, price is above average total cost. The firm in panel (b) makes losses because, at this quantity, price is less than average total cost. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 5 product or service or otherwise on a password-protected website for classroom use.  Long Run Equilibrium If firms are making profit in short run – New firms - incentive to enter the market (ผลของกําไรในระยะสั้น ทําใหผูผลิตเขามาในตลาดมากขึ้น) – Increase number of products (ปริมาณผลิตเพิ่มขึน้ ) – Reduces demand faced by each firm Demand curve shifts left (เสน demand shift ไปทางซาย) – Each firm’s profit declines until: zero economic profit (ในระยะยาว แตละ firm จะมีกําไรลดลง จนเทากับศูนย) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 6 product or service or otherwise on a password-protected website for classroom use. Figure 3 A Monopolistic Competitor in the Long Run Price MC ATC Price = ATC Demand MR 0 Profit- maximizing Quantity quantity In a monopolistically competitive market, if firms are making profit, new firms enter, and the demand curves for the incumbent firms shift to the left. Similarly, if firms are making losses, old firms exit, and the demand curves of the remaining firms shift to the right. Because of these shifts in demand, a monopolistically competitive firm eventually finds itself in the long-run equilibrium shown here. In this long-run equilibrium, price equals average total cost, and the firm earns zero profit. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 7 product or service or otherwise on a password-protected website for classroom use.  Long Run Equilibrium Zero economic profit – Demand curve Tangent to average total cost curve (เสน demand สัมผัสเสน ATC) At quantity where marginal revenue = marginal cost (ผลิตที่จุด กําไรสูงสุด MR = MC) – Price = average total cost (ราคาเทากับ ATC แตสูงกวา MC) – Price exceeds marginal cost © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 8 product or service or otherwise on a password-protected website for classroom use.  Long Run Equilibrium Monopolistic versus perfect competition – Monopolistic competition (ตลาดมีลักษณะกึ่งแขงขันกึ่งผูกขาด) Quantity: not at minimum ATC (ปริมาณสวนเกิน และไมไดอยูจุดผลิตที่ทําใหได efficient scale หรือจุดต่ําสุดของ ATC) – Excess capacity P > MC, markup over marginal cost (ราคา markup มากกวา MC) Product variety (สินคามีความหลากหลาย) – Perfect competition (ตลาดแขงขัน ในระยะยาวปริมาณผลิตจะอยูที่จุดต่ําสุดของ ATC) Quantity: at minimum ATC (ผลิตที่จุดต่ําสุดของ ATC) – Efficient scale P = MC No variety (สินคามีลักษณะ homogeneous ไมหลากหลาย/แตกตางกัน) 9 Figure 4 Monopolistic versus Perfect Competition (a) Monopolistically Competitive Firm (b) Perfectly Competitive Firm Price Price MC MC ATC Price ATC P=MC P=MR MC (demand curve) Demand MR 0 Quantity Efficient Quantity 0 Quantity produced Quantity produced scale = Efficient scale Excess capacity Panel (a) shows the long-run equilibrium in a monopolistically competitive market, and panel (b) shows the long- run equilibrium in a perfectly competitive market. Two differences are notable. (1) The perfectly competitive firm produces at the efficient scale, where average total cost is minimized. By contrast, the monopolistically competitive firm produces at less than the efficient scale. (2) Price equals marginal cost under perfect competition, but price is above marginal cost under monopolistic competition. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 10 product or service or otherwise on a password-protected website for classroom use. Table 1 Monopolistic Competition: Between Perfect Competition and Monopoly © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 11 product or service or otherwise on a password-protected website for classroom use.