EC120 Chapter Notes - Chapter 16: Monopolistic Competition, Marginal Revenue, Profit Maximization
11/14/15
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EC120 – CHAPTER 16: MONOPOLISTIC COMPETITION
BETWEEN MONOPOLY AND PERFECT COMPETITION
• OLIGOPOLY: A market structure in which only a few sellers offer similar or
identical products
• CONCENTRATION RATIO: The percentage of total output in the market
supplied by the four largest firms
o E.g. Cigarettes have a concentration ratio of 95%
• MONOPOLISTIC COMPETITION: A market structure in which many firms sell
products that are similar but not identical
o E.g. The sale of novels
• Monopolistic competition has the following attributes:
o Many sellers
o Product differentiation
o Free entry and exit
THE MONOPOLISTICALLY COMPETITIVE FIRM IN THE SHORT RUN
• Quantity at which MR = MC is profit maximizing
• The point on the demand curve must be above the ATC for the company to be
making profit
LONG-RUN EQUILIBRIUM
• Losses encourage exit, and exit shifts the demand curve to the right
• The remaining firms experience rising profit as a result
• When demand is tangent to ATC the maximum profit is zero
o Lines up with point where MC = MR
• Profit maximization requires marginal revenue to equal marginal cost and
because the downward-sloping demand curve makes marginal revenue less
than price
• Price equals ATC
• Economic profit in these types of firms is driven to zero, but monopolies can
earn positive economic profit
EXCESS CAPACITY
• Under monopolistic competition, firms produce on the downward-sloping
portion of the ATC
• A monopolistic competition firm can increase the quantity it produces and
lower the average total cost of production
• Firm forgoes this opportunity because they would need to lower price to sell
additional output
MARKUP OVER MARGINAL COST
• In a monopolistically competitive firm, the price exceeds marginal cost
• Price must be above MC in order to equal ATC
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EC120 Full Course Notes
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Document Summary
11/14/15: oligopoly: a market structure in which only a few sellers offer similar or identical products, concentration ratio: the percentage of total output in the market supplied by the four largest firms, e. g. Cigarettes have a concentration ratio of 95: monopolistic competition: a market structure in which many firms sell products that are similar but not identical, e. g. The sale of novels: monopolistic competition has the following attributes, many sellers, product differentiation, free entry and exit. The monopolistically competitive firm in the short run: quantity at which mr = mc is profit maximizing, the point on the demand curve must be above the atc for the company to be making profit. In a monopolistically competitive firm, the price exceeds marginal cost: price must be above mc in order to equal atc. 11/14/15: always eager to gain another customer, since an extra unit sold at the posted price means more profit (price > mc)
