Topic11 - The spectrum of market structures 11....

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1 11. Monopolistic Competition The spectrum of market structures Number of firms? Type of product? Monopolistic competition · Novels · Movies Perfect competition · Wheat · Milk One Firm Few Firms Many firms Differentiated Identical Monopoly · Tap water · Cable TV Oligopoly · Tennis balls · Crude oil Types of imperfectly competitive markets • Monopolistic competition: – Many firms selling products that are similar but not identical • Oligopoly: – Only a few sellers, each offering a similar or identical product to the others Monopolistic competition (MC) • Markets that have some features of competition and some features of monopoly MC Model Assumptions • Many sellers • Product differentiation • Each firm faces downward sloping demand curve (they are not price-takers) • Free entry and exit in the long-run Monopolistic competition in the short run • In the short run, the monopolistically competitive firm follows a monopolist’s rule for profit maximisation. – Produce the quantity where MR = MC .
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2 Monopolistic competition in the short run Quantity 0 Price Demand MR Monopolistic competition in the short run Quantity 0 Price Demand MR ATC MC Monopolistic competition in the short run Firm makes a profit Quantity Profit- maximising quantity 0 Price Price Demand MR ATC Average total cost Profit MC Monopolistic competition in the short run Quantity 0 Price Demand MR MC ATC Monopolistic competition in the short run Quantity 0 Price Price Demand MR Average
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Topic11 - The spectrum of market structures 11....

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