HOch12_instructor monopolistic competition.ppt

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1. c h a p t e r
twelve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
Prepared by: Fernando & Yvonn Quijano
Monopolistic Competition:
The Competitive Model in a More Realistic Setting

2. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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After studying this chapter,
you should be able to:
Explain why a monopolistically
competitive firm has a
downward-sloping demand
curve.
Explain how a monopolistically
competitive firm decides the
quantity to produce and the
price to charge.
Analyze the situation of a
monopolistically competitive
firm in the long run.
Compare the efficiency of
monopolistic competition and
perfect competition.
Define marketing and explain
how firms use it to differentiate
their products.
Identify the key factors that
determine a firm’s profitability.
Starbucks: Growth through Product Differentiation
LEARNING OBJECTIVES
1
2
3
4
5
6
…the coffeehouse market is
monopolistically
competitive, rather than
perfectly competitive.

3. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Monopolistic Competition:
The Competitive Model in a More Realistic Setting
Monopolistic competition A
market structure in which barriers to
entry are low, and many firms
compete by selling similar, but not
identical, products.

4. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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The Demand Curve for a Monopolistically Competitive Firm
12 -1
The Downward-Sloping Demand
for Caffe Lattès at a Starbucks
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
LEARNING OBJECTIVE1

5. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping Demand Curve
Demand and Marginal Revenue
at a Starbucks
12 –1
CAFFÈLATTES
SOLD PER WEEK
(Q)
PRICE
(P)
TOTAL
REVENUE
(TR = P x Q)
AVERAGE
REVENUE
(AR –TR/Q)
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
0
1
2
3
4
5
6
7
8
9
10
$6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
$0.00
5.50
10.00
13.50
16.00
17.50
18.00
17.50
16.00
13.50
10.00
-
$5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
-
$5.50
4.50
3.50
2.50
1.50
0.50
-0.50
-1.50
-2.50
-3.50

6. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
12 -2
How a Price Cut Affects a Firm’s
Revenue
Marginal Revenue for a Firm with a Downward-Sloping Demand Curve

7. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
7of 19
Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping Demand Curve
12 -3
The Demand and Marginal Revenue
Curves for a Monopolistically
Competitive Firm

8. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
8of 19
LEARNING OBJECTIVE2
12 -4
Maximizing Profit in a
Monopolistically Competitive
Market
How a Monopolistically Competitive Firm
Maximizes Profits in the Short Run

9. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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What Happens to Profits in the Long Run?
LEARNING OBJECTIVE3
How Does Entry of New Firms Affect the Profits of Existing Firms?
12 -5
How Entry of New Firms Eliminates Profits
Don’t Confuse Zero Economic Profit with Zero Accounting Profit

10. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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What Happens to Profits in the Long Run?
How Does Entry of New Firms Affect the Profits of Existing Firms?
The Short Run and the Long
Run For a Monopolistically
Competitive Firm
12 –2

11. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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The Rise and Fall of Apple’s Macintosh
Computer
12 -1
Macintosh lost its
differentiation, but still has a
loyal –if small –following.

12. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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The Short Run and the Long Run for the Macintosh
12 -2
LEARNING OBJECTIVE3

13. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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What Happens to Profits in the Long Run?
A firm’s profits will be eliminated in the
long run only if the firm stands still and
fails to find new ways of differentiating
its product or fails to find new ways of
lowering the cost of producing its
product.
Is Zero Economic Profit Inevitable in the Long Run?

14. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Staying One Step Ahead of the Competition:
Eugène Schueller and L’Oréal
12 -2
Unlike many monopolistically
competitive firms, L’Orèal has
earned economic profits for a
very long time.

15. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Comparing Perfect Competition
and Monopolistic Competition
12 -6
Comparing Long-Run
Equilibrium under Perfect
Competition and
Monopolistic Competition
LEARNING OBJECTIVE4

16. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Comparing Perfect Competition
and Monopolistic Competition
The profit-maximizing level of output for a
monopolistically competitive firm comes at a level
of output where price is greater than marginal
cost and the firm is not at the minimum point of
its average total cost curve.
Excess Capacity under Monopolistic Competition
Consumers benefit from being able to purchase
a product that is differentiated and more closely
suited to their tastes.
How Consumers Benefit from Monopolistic
Competition

17. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Abercrombie and Fitch: Can the Product Be
Too Differentiated?
12 -3
Did Abercrombie and
Fitch narrow its target
market too much?

18. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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How Marketing Differentiates Products
LEARNING OBJECTIVE5
Marketing All the activities necessary
for a firm to sell a product to a
consumer.
Brand Management
Brand Management The actions of
a firm intended to maintain the
differentiation of a product over time.

19. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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What Makes a Firm Successful?
LEARNING OBJECTIVE6
12 -7
What Makes a Firm Successful?

20. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Midnight Snack
Figure 1: Product differentiation shifting the demand
curve for a monopolistic competitor
Figure 2: “Spreading the overhead”

21. © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1
st
ed.
CHAPTER 12: Monopolistic Competition: The Competitive Model in a More Realistic Setting
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Brand management
Marketing
Monopolistic Competition