Entry and Monopolistic Competition

1. Entry andMonopolistic Competition

2. Entry and Monopolistic Competition • An entrepreneur is a person who has an idea for a business and coordinates the production and sale of goods and services. Entrepreneurs take risks, committing time and money to a business without any assurance that it will be profitable.

3. Output and Entry Decisions Marginal PRINCIPLEIncrease the level of an activity if its marginal benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds its marginal benefit. If possible, pick the level at which the activity’s marginal benefit equals its marginal cost.

4. Short-Run Equilibrium in Monopolistic Competition: A Single Toothbrush Producer • The single toothbrush producer (a monopolist) picks point n (where marginal revenue equals marginal cost). 300 toothbrushes are supplied per minute at a price of $2.00 (point m) and an average cost of $0.90 (point c). The profit per brush is $1.10.

5. Entry Decreases Priceand Increases Average Cost • The entry of a second toothbrush producer shifts the demand curve for the original firm to the left: A smaller quantity is sold at each price.

6. Entry Decreases Priceand Increases Average Cost The marginal principle is satisfied at point x. The firm produces a smaller quantity (200 instead of 300 toothbrushes) at a higher average cost ($1.00 instead of $0.90) and sells at a lower price ($1.85 instead of $2.00).

7. The Effects of Market Entry • There are three reasons why profit decreases for the individual firm after entry of a second firm: • Lower price • Lower quantity sold • Higher average cost of production

8. Monopolistic Competition • Monopolistic competition is a market served by dozens of firms selling slightly different products. Product differentiation is a strategy of distinguishing one product from other similar products.

9. Monopolistic Competition Firms may differentiate their product in several ways: • Physical characteristics • Location • Services • Aura or image

10. Long-Run Equilibrium with Monopolistic Competition: Toothbrushes • In a monopolistically competitive market, new firms will continue to enter until economic profit is zero. The typical firm picks the quantity at which its marginal revenue equals its marginal cost (point g). Economic profit is zero because the price equals the average cost (shown by point h).

11. Trade-Offs withMonopolistic Competition

12. Long-Run Equilibrium with Monopolistic Competition: Music Stores • Music stores and other retailers differentiate their products by selling them at different locations. The typical firm chooses the quantity of CDs at which its marginal revenue equals its marginal cost (point g). Economic profit is zero because the price equals the average cost (shown by point h).