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Seventh Edition The Big Picture
EPrinciples of
conomics
1) Chapter 13: The cost of production
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N. Gregory Mankiw (18 Now, we will look at firm’s revenue
Gerson But revenue depends on market structure
ciech
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Wo 1. Competitive market (chapter 14)
Monopolistic 2. Monopoly (chapter 15)
CHAPTER 3. Monopolistic Competition (this chapter)
16 Competition 4. Oligopoly (chapter 17)
Are there other types of markets?
Yes, but not for now
Modified by Joseph Tao-yiWang © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Seventh Edition Summary
EPrinciples of • For a firm in a perfectly competitive market,
conomics
1)
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- price = marginal revenue = average revenue.
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N. Gregory Mankiw (18
n
erso
G • If P > AVC, a firm maximizes profit by producing
ciech
j
Wo the quantity where MR = MC. If P < AVC, a firm
will shut down in the short run.
CHAPTER Monopolistic • If P < ATC, a firm will exit in the long run.
Perfect • In the short run, entry is not possible, and an
14 Competition increase in demand increases firms’ profits.
• With free entry and exit, profits = 0 in the long
Modified by Joseph Tao-yiWang run, and P = minimum ATC.
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Perfect Competition Seventh Edition
EPrinciples of
conomics
Products are Perfect Substitutes 1)
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Result: Price Taking N. Gregory Mankiw (18
Gerson
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P = MR = MC Wo
SR: Will operate if P > AVC (FC is sunk)
LR: Will operate at P = ATC CHAPTER Monopoly
Firms enter if P > ATC; exit if P < ATC 15
4 Modified by Joseph Tao-yiWang
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Summary Summary
• A monopoly firm is the sole seller in its market. • Monopoly firms maximize profits by producing
Monopolies arise due to barriers to entry, the quantity where marginal revenue equals
including: government-granted monopolies, the marginal cost. But since marginal revenue is
control of a key resource, or economies of scale less than price, the monopoly price will be
over the entire range of output. greater than marginal cost, leading to a
• A monopoly firm faces a downward-sloping deadweight loss.
demand curve for its product. As a result, it • Monopoly firms (and others with market power)
must reduce price to sell a larger quantity, which try to raise their profits by charging higher prices
causes marginal revenue to fall below price. to consumers with higher willingness to pay.
This practice is called price discrimination.
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Summary Monopoly
• Policymakers may respond by regulating MR=MC to maximize profit (still true!)
monopolies, using antitrust laws to promote But, P > MR (D - downward sloping)
competition, or by taking over the monopoly and Welfare Cost of a Monopoly:
running it. Due to problems with each of these
options, the best option may be to take no Profits (unfair?) vs. DWL (efficiency loss!)
action. Cures? Do nothing?
• Or, just auction off the market. (Demsetz, 1968) Auction off the market!
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 9
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Seventh Edition In this chapter,
EPrinciples of look for the answers to these questions
conomics
1) • What market structures lie between perfect
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N. Gregory Mankiw (18 competition and monopoly, and what are their
Gerson characteristics?
ciech
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Wo • How do monopolistically competitive firms choose
price and quantity? Do they earn economic profit?
CHAPTER Monopolistic • How does monopolistic competition affect society’s
16 welfare?
Competition • What are the social costs and benefits of
advertising?
Modified by Joseph Tao-yiWang © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
INTRODUCTION: Characteristics & Examples of Monopolistic
Between Monopoly and Competition Competition
Two extremes Characteristics:
Perfect competition (perfect substitutes): many Many sellers
firms, identical products Product differentiation
Monopoly (no close substitutes): one firm Location, location, location! (產品定位)
Free entry and exit
In between these extremes: imperfect competition Examples:
Oligopoly: only a few sellers offer similar or apartments
identical products. books
Monopolistic competition: many firms sell bottled water
similar but not identical products. clothing
= Partial Substitutes! fast food
night clubs
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 12 © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 13
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Comparing Perfect & Monop. Competition Comparing Monopoly & Monop. Competition
Perfect Monopolistic Monopoly Monopolistic
competition competition competition
number of sellers many many number of sellers one many
free entry/exit yes yes free entry/exit no yes
long-run econ. profits zero zero long-run econ. profits positive zero
the products firms sell identical differentiated firm has market power? yes yes
firm has market power? none, price-taker yes downward- downward-
Dcurve facing firm sloping sloping
Dcurve facing firm horizontal downward- (market demand)
sloping close substitutes none many
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1414 © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1515
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A Monopolistically Competitive Firm Earning A Monopolistically Competitive Firm
Profits in the Short Run With Losses in the Short Run
The firm faces a For this firm,
downward-sloping P< ATC
Dcurve. Price at the output where Price
profit MC MR= MC. MC
At each Q, MR < P. P ATC losses ATC
To maximize profit, The best this firm ATC
firm produces Q ATC D can do is to
where MR = MC. minimize its losses. P
The firm uses the MR D
Dcurve to set P. MR
Q Quantity Q Quantity
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1616 © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1717
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Monopolistic Competition and Monopoly A Monopolistic Competitor in the Long Run
Short run: Under monopolistic competition, Entry and exit
firm behavior is very similar to monopoly. occurs until
Long run: In monopolistic competition, P= ATCand Price
entry and exit drive economic profit to zero. profit = zero. MC
If profits in the short run: Notice that the ATC
New firms enter market, firm charges a P = ATC
taking some demand away from existing firms, markup of price markup
prices and profits fall. over marginal cost
If losses in the short run: and does not MC D
Some firms exit the market, produce at MR
remaining firms enjoy higher demand and prices. minimum ATC. Q Quantity
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 18 © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 1919
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Why Monopolistic Competition Is Monopolistic Competition and Welfare
Less Efficient than Perfect Competition
1. Excess capacity Monopolistically competitive markets do not
The monopolistic competitor operates on the have all the desirable welfare properties of
downward-sloping part of its ATC curve, perfectly competitive markets.
produces less than the cost-minimizing output. Because P > MC,
Under perfect competition, firms produce the market quantity < socially efficient quantity.
quantity that minimizes ATC. Yet, not easy for policymakers to fix this problem:
2. Markup over marginal cost Firms earn zero profits, so cannot require them
to reduce prices.
Under monopolistic competition, P > MC.
Under perfect competition, P = MC.
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2020 © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 21
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Monopolistic Competition and Welfare ACTIVE LEARNING 1
Number of firms in the market may not be optimal, Advertising
due to external effects from the entry of new firms: 1. So far, we have studied three market structures:
The product-variety externality: perfect competition, monopoly, and monopolistic
surplus consumers get from the introduction competition. In each of these, would you expect
of new products to see firms spending money to advertise their
The business-stealing externality: products? Why or why not?
losses incurred by existing firms 2. Is advertising good or bad from society’s
when new firms enter market viewpoint? Try to think of at least one “pro” and
The inefficiencies of monopolistic competition are “con.”
subtle and hard to measure. No easy way for
policymakers to improve the market outcome.
© 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2222 © 2015 CengageLearning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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