Monopolistic competition Ch9

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Monopolistic competition (HL only)

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Learning Objectives At the end of this chapter you will be able to Explain the assumptions of monopolistic competition Define and give examples of product differentiation Explain and illustrate the demand curve for firms in monopolistic competition Explain how firms maximise profits in monopolistic competition Explain and illustrate short run profit and loss situations in monopolistic competition Explain and illustrate the long run equilibrium in monopolistic competition Explain and illustrate the movement from short run to long run in monopolistic competition Explain and illustrate productive and allocative efficiency in the short and long run in monopolistic competition Compare and contrast perfect competition and monopolistic competition

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Monopolistic competition We now look at another part of the spectrum The assumptions we make here are The industry is made up of a fairly large number of firms The firms are small relative to the industry so their actions are unlikely to have a great effect on competitors – they can act independently Firms all produce slightly differentiated products (consumers can tell one product from another) Firms completely free to enter or leave the industry (no barriers to entry or exit) Monopolistic – fairly large number of firms that a small relative to the industry

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This theory was devised by Edward Chamberlin (1899-1967) He was not happy with the two extreme theories and wanted to devise something more realistic Watch mjmfoodie monopoly http://www.youtube.com/watch?v=T3F1Vt3IyNc

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Productive and allocative efficiency in monopolistic competition What does productively efficient mean? The firm is operating at its lowest possible cost per unit – the lowest point on the AC curve Is the monopolistic firm productively efficient? No it is not We can see in this diagrams that the firm will produce at the profit maximisation point (MC = MR) This is not productively efficient because it is not the lowest point on the AC curve

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Productive and allocative efficiency in monopolistic competition What does allocatively efficient mean? Where MC = AR Is the monopolistic firm allocatively efficient? No it is not; it produces less than the allocatively efficient amount

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Comparing monopolistic competition with perfect competition The monopoly is inefficient because it is able to restrict output and increase prices The monopolistic firm’s inefficiency is due to the consumer’s desire for variety Though allocative efficiency does not occur it is hard to argue that consumers are worse off than with perfect competition Monopolistic competition gives consumers the opportunity to make choices which is why they are prepared to pay slightly higher prices

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Time for you to do some work!! For homework read through the chapter Now create a presentation for your given exam question (P125) – to be presented next lesson All – answer the exam question for homework