Scribd
Upload
11 views

Basic MicroEconomics Module No. 9

Monopolistic competition is characterized by a relatively large number of sellers, differentiated products, and easy entry and exit from the market. Firms have some control over prices due to product differentiation, but the demand curve is highly elastic, influenced by the number of competitors and product variations. In the long run, firms typically earn normal profits as unprofitable firms exit the market and competitive pressures drive improvements in product quality and variety.

Uploaded by

teologolei29
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
11 views

Basic MicroEconomics Module No. 9

Monopolistic competition is characterized by a relatively large number of sellers, differentiated products, and easy entry and exit from the market. Firms have some control over prices due to product differentiation, but the demand curve is highly elastic, influenced by the number of competitors and product variations. In the long run, firms typically earn normal profits as unprofitable firms exit the market and competitive pressures drive improvements in product quality and variety.

Uploaded by

teologolei29
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 2

1

Basic Micro Economics Some control over price even if there is a


MODULE No. 9 relatively large number of firms, these firms
have some control over their prices due to
differentiation.
Monopolistic Competition
Easy Entry and Exit
Monopolistically competitive market
exhibits the following characteristics: If we are going to compare the ease of entry of a
monopolistically competitive, industry with
1. Relatively large number of sellers oligopoly and monopoly, it is relatively easier.
2. Differentiated products The reason behind this is that firms in this
3. Easy entry and exit industry are relatively small, which only requires
low capital.
Among these three characteristics, the first and
last, exhibit the competitive aspect of this type of Exit is also relatively easy since nothing
market and the second exhibits the monopolistic prevents an unprofitable firm from shutting
aspect. down.

Relatively Large Number of Sellers Advertising

Monopolistic competition can be described by If consumers would not be aware of the product
having a fairly large number of firms, but not as differences, the efforts in making those would be
hundreds or thousands like in a pure wasted. Advertisements of these products are
competition. It only have a small share in the made heavily, which sets the goal of achieving a
total market, giving it a limited control over the nonprice competition.
market price.
Price and Output in Monopolistic
Because of the large number of firms, the Competition
restriction of output and price-setting is not likely
to be possible, there will be no interdependence What is the process of making price and output
among them. Each firm may set his own price decisions of a monopolistically competitive
without thinking of the rival’s reaction. market? Let us discover it by making an
assumption that firms are producing a specific
Differentiated Products differentiated product and paying a particular
amount of advertising.
A purely competitive market produces
standardized products, in contrast, a The Firm’s Demand Curve
monopolistically competitive one offers
differentiated products. Firms make variations The demand curve faced by monopolistically
of a specific product. competitive firms is highly elastic. It
differentiates a monopolistic competition from
Product attributes differentiation may be in the monopoly and pure competition. It is more
product’s physical attributes or quality. The elastic as compared with a monopolist, since it
materials used, the design and the process of has several competitors. But a monopolistically
producing those products varies. Ballpens for competitive firm’s demand curve is not perfectly
example, differ in size, the ballpoint and other elastic since it has fewer numbers of competitors
features. Our all-time favorite French fries may and products produced are differentiated making
feature different cuts. it not a perfect substitute.

Service – the courteousness of the clerks, the The demand curve for this firm highly depends
way they help their customer’s needs is a on the number of rivals in the market and the
differentiation from other stores. It also includes degree of product differentiation. If poor
the credits and the warranties that a store is differentiation exists, and there is a large
offering. number of competitors, there will be a greater
price elasticity which may soon lead the firm to
Location – a store’s location and accessibility is become a purely competitive one.
an important aspect in competition. We are all
familiar with 7Eleven and Mini Stop, these Short Run: Profit or Loss
convenience stores are strongly competing in
the market even with big stores. Just like the other firms that we have discussed,
a monopolistically competitive firm maximizes its
Brand Names and Packaging – the trademarks, profit and minimizes its loss in the short run by
names and packaging creates a differentiation producing the number of outputs where the
among products. Candy wrappers attract kids marginal revenue equals marginal cost (MR =
from purchasing that good for example. MC).

1
2

Long Run : Just a Normal Profit products too, in order to meet their rival’s quality.
The society, then, benefit from better quality of
In the long run, unprofitable industries will be products.
abandoned by firms and a profitable
monopolistically competitive industry will be
penetrated by several firms. So a
monopolistically competitive firm will only break
even in the long run, or what we consider the
normal profit.

Profit: Firms will enter

In the short run, economic profit attracts other


firms from entering in the industry since entry is
relatively easy. As firms enter, the demand
curve shifts to the left. The reason behind this is
the smaller share of each firm is the total
demand in the market, where there is already a
large number of close substitutes which will
soon result in a decline in economic profit.

Losses: Firms will leave

If there are several losses in the short run, firms


will exit the long run. Because of this, there will
be a fewer number of substitutes and smaller
number of competitors, the demand curve will
shift to the right, which will soon make their
losses disappear and give way to normal profit.

The firm earns a normal profit only in the long


run. This may not always occur. The world of
small businesses in the real world differs from
that of the theoretical model.

Product Variety

A firm need not watch every competitor’s action


of imitating their products because firms produce
items which are distinguishable from those of
the other producers. Firms can stay ahead of
the other firm by continuing the efforts for
product differentiation and increasing the
amount allocated for advertising, simply,
improving their products and advertisements
further.

Even if the improvement will increase the firm’s


costs, it will also increase the product’s demand.
If the demand increases in an amount which can
compensate the costs, then the firm is in good
position.

Benefits of Product Variety

Improvements in the product and variety will


sustain a firm’s economic profit. This will result
in a benefit for the society and can offset the
cost of inefficiency of monopolistic competition.
Consumers have a wider variety of preferences.
Like the pizza that we all love, there is a thin
crust pizza, for those who do not like thick crust.
This gives the consumer a wider range of
choices, therefore it is their benefit. If a certain
firm further improves its products, it gives the
competitors the reason for improving their

You might also like