23Lecture - LECTURE 23 Today is Tuesday The price of gold...

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LECTURE 23 Today is Tuesday, November 16, 2010. The price of gold has taken a beating the past few days, dropping from $1,400 to $1,330 per troy ounce. MONOPOLISTIC COMPETITION At one end of the industrial organization spectrum, or the market structure spectrum, is competition. At the other end of the spectrum is monopoly. Both models have been discussed in detail. Between the two extremes are two other types of industries, or markets: monopolistic competition and oligopoly. In the same way that monopoly is a Greek construct meaning "a single firm, or producer", oligopoly means "a few producers". We will begin our discussion with an analysis of monopolistic competition, a term originating during the Great Depression of the 1930's from the writings of two famous economists of the time, Ed Chamberlin and Joan Robinson. Attached to this lecture is Table 23-1, Characteristics of Monopolistic Competition. It is important that you compare Table 23-1 with its two predecessors, Table 19-1, Characteristics of Firms in Competition, and Table 21-1, Characteristics of Monopoly Firms. Note that the first two structure characteristics of competition and monopolistic competition are identical: there are many producers in the industry supplying the market, and there is freedom of entry and exit. The significant difference between the two types of firms, or industries, is the third structure characteristic: competitive firms produce a perfectly homogeneous product. 1 Firms in monopolistic competition produce a differentiated product . This means that the products of firms in monopolistic competition are not perfectly homogeneous, but are different , somehow. You are familiar with a large number of such products. You see them at the market every day. The most common goods include baked bread, soft drinks, beer, soap and detergents, and countless prepared foods such as soup, cheese, tomato sauce, and potato chips. If you have ever seen an advertisement for a product, and you see a lot of different brands on the store shelf, you have discovered the wonderful world of monopolistic competition. 1 This is the only time that I will utilize, and insist upon, the word perfect . Corn production in the U.S. is a competitive industry. There are thousands of corn producers, some as small as 40 acre farms, and some as large as Con-Agra's million acre farms. But the product is perfectly homogeneous: when the corn from the 40-acre Nebraska farm is harvested, it can be stored (mixed) with the output of the giant corporate farm in a silo (grain elevator) like you see all across the Midwest. When the small farmer retrieves his corn to sell or use as cattle feed, he just gets the same number of bushels out that he stored in the grain elevator. He probably actually receives someone else's corn, but no one cares because it is a perfectly homogeneous product. This is the main reason why Farmer Brown does not advertise his corn. Under competition, he can sell all he wants at the going market price without having to advertise.
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How many different beer producers are there in the United States? How
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23Lecture - LECTURE 23 Today is Tuesday The price of gold...

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