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Types of Imperfectly Competitive Markets

Explore the nuances of monopolistic competition, including product differentiation, market entry and exit, short-run profit maximization, and long-run equilibrium. Learn about the dynamics of firms in this market structure.

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Types of Imperfectly Competitive Markets

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  1. Types of Imperfectly Competitive Markets • Monopolistic Competition ä Many firms selling products that are similar but not identical. • Oligopoly ä Only a few sellers, each offering a similar or identical product to the others.

  2. Monopolistic Competition • Markets that have some features of competition and some features of monopoly.

  3. Attributes of Monopolistic Competition • Many sellers • Product differentiation • Free entry and exit

  4. Many Sellers • There are many firms competing for the same group of customers. ä Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc.

  5. Product Differentiation • Each firm produces a product that is at least slightly different from those of other firms. • Rather than being a price taker, each firm faces a downward-sloping demand curve.

  6. Free Entry or Exit • Firms can enter or exit the market without restriction. • The number of firms in the market adjusts until economic profits are zero.

  7. Monopolistic Competition in the Short Run • In the short run, the monopolistically competitive firm follows a monopolist’s rule for profit maximization. ä Produce the quantity where MR = MC. ä Price should be greater than ATC.

  8. Monopolistic Competition in the Short Run

  9. Monopolistic Competition in the Short Run Price 0 Quantity

  10. Monopolistic Competition in the Short Run Price Demand MR 0 Quantity

  11. Monopolistic Competition in the Short Run Price MC ATC Demand MR 0 Quantity

  12. Monopolistic Competition in the Short Run Price MC ATC Price Demand MR 0 Profit- Quantity maximizing quantity

  13. Monopolistic Competition in the Short Run Firm Makes a Profit Price MC ATC Price Demand MR 0 Profit- Quantity maximizing quantity

  14. Monopolistic Competition in the Short Run Firm Makes a Profit Price MC ATC Price Average total cost Demand MR 0 Profit- Quantity maximizing quantity

  15. Monopolistic Competition in the Short Run Firm Makes a Profit Price MC ATC Price Average total cost Demand Profit MR 0 Profit- Quantity maximizing quantity

  16. Monopolistic Competition in the Short Run Price MC ATC Demand MR 0 Quantity

  17. Monopolistic Competition in the Short Run MC Price ATC Demand MR 0 Quantity

  18. Loss- minimizing quantity Monopolistic Competition in the Short Run MC Price ATC Price Demand MR 0 Quantity

  19. Loss- minimizing quantity Monopolistic Competition in the Short Run Firm Makes Losses MC Price ATC Price Demand MR 0 Quantity

  20. Loss- minimizing quantity Monopolistic Competition in the Short Run Firm Makes Losses MC Price ATC Average total cost Price Demand MR 0 Quantity

  21. Loss- minimizing quantity Monopolistic Competition in the Short Run Firm Makes Losses MC Price ATC Losses Average total cost Price Demand MR 0 Quantity

  22. Monopolistic Competition in the Short Run • Short-run economic profits encourage new firms to enter the market. This: ä Increases the number of products offered. ä Reduces demand faced by incumbent firms. ä Incumbent firms’ demand curves shift to the left. äDemand for the incumbent firms’ products fall, and their profits decline.

  23. Monopolistic Competition in the Short Run • Short-run economic losses encourage firms to exit the market. This: ä Decreases the number of products offered. ä Increases demand faced by the remaining firms. ä Shifts the remaining firms’ demand curves to the right. äIncreases the remaining firms’ profits.

  24. The Long-Run Equilibrium • Firms will enter and exit until the firms are making exactly zero economic profits.

  25. Two Characteristics of Long-Run Equilibrium • As in a monopoly, price exceeds marginal cost. ä Profit maximization requires marginal revenue to equal marginal cost. ä The downward-sloping demand curve makes marginal revenue less than price.

  26. Two Characteristics of Long-Run Equilibrium • As in a competitive market, price equals average total cost. However, not at the min of ATC. ä Free entry and exit drive economic profit to zero.

  27. A Monopolistic Competitor in the Long Run

  28. A Monopolistic Competitor in the Long Run Price 0 Quantity

  29. A Monopolistic Competitor in the Short Run Price MC ATC 0 Quantity

  30. A Monopolistic Competitor in the Short Run Price MC ATC Demand MR 0 Quantity

  31. Loss-minimizing quantity A Monopolistic Competitor in the Short Run Price MC ATC Demand MR 0 Quantity

  32. A Monopolistic Competitor in the Short Run Price MC ATC Demand MR 0 Quantity

  33. A Monopolistic Competitor in the Long Run Price MC ATC Demand MR 0 Quantity

  34. A Monopolistic Competitor in the Short Run Price MC ATC 0 Quantity

  35. A Monopolistic Competitor in the Short Run Price MC ATC Demand MR 0 Quantity

  36. Profit-maximizing quantity A Monopolistic Competitor in the Short Run Price MC ATC Demand MR 0 Quantity

  37. A Monopolistic Competitor in the Short Run Price MC ATC Demand MR 0 Quantity

  38. A Monopolistic Competitor in the Long Run Price MC ATC Demand MR 0 Quantity

  39. A Monopolistic Competitor in the Long Run Price MC ATC Demand MR 0 Quantity

  40. A Monopolistic Competitor in the Long Run Price MC ATC Demand MR 0 Long-run Profit-maximizing quantity Quantity

  41. Monopolistic versus Perfect Competition • There are two noteworthy differences between monopolistic and perfect competition—excess capacity and markup.

  42. Excess Capacity • There is no excess capacity in perfect competition in the long run.

  43. Excess Capacity • Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale.

  44. Excess Capacity • There is excess capacity in monopolistic competition in the long run.

  45. Excess Capacity • In monopolistic competition, output is less than the efficient scale of perfect competition.

  46. Excess Capacity Monopolistically Competitive Firm Perfectly Competitive Firm Price Price Quantity Quantity

  47. Excess Capacity Monopolistically Competitive Firm Perfectly Competitive Firm Price Price MC ATC MR Demand Quantity Quantity

  48. Excess Capacity Monopolistically Competitive Firm Perfectly Competitive Firm Price Price MC MC ATC ATC P = MC P = MR (demand curve) MR Demand Quantity Quantity

  49. Excess Capacity Monopolistically Competitive Firm Perfectly Competitive Firm Price Price MC MC ATC ATC P P = MC P = MR (demand curve) MR Demand Quantity Quantity

  50. Excess Capacity Monopolistically Competitive Firm Perfectly Competitive Firm Price Price MC MC ATC ATC P P = MC P = MR (demand curve) MR Demand Quantity Quantity Quantity produced Quantity produced

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