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CHAPTER 12: MONOPOLISTIC COMPETITION - Coggle Diagram
CHAPTER 12: MONOPOLISTIC COMPETITION
CHARACTERISITCS
Product differentiation
Service
Location
Advertising
Nonprice competition
Higher elasticity = lower pricing power as less control over reaction of consumers during price changes
Some control over price
Easy entry and exit
Relativlely: Some financial barriers to advertise and differentiate
Four firm concentration
FFC = Output of the 4 largest firms / Total output of the industry
Low in pure competition (Little market share)
Higher in Oligopoly and pure monopoly (More market share per firm)
<40% = Monopolisticallt compeititive
40% = Oligopolies
Herfindahl index
SUM of market share percentages sqaured
Lower the value = more likely to be monopolistically competitive
Limit of 10 000
PRICE AND OUTPUT
Demand curve
Highly elastic as there are many other substitutes and rivals
Short run: Profit or loss
MR = MC: Profit = (P - ATC) x Quantity
When demand curve is above ATC
MR = MC: Loss = (ATC - P) x Quantity
When demand curve is below ATC
Long run: Firms only ever break even
More firms enter and dilute market share and shifts demand curve left
Demand curve becomes tangental to ATC where MR = MC
NO further incentive for additional firms to enter
However, in reality, some firms has differentiated so well that an economic profit is seen and/or entry to some industries isn't as easy as others
As firms exit, demand curve shifts right
More market share and less substitutes
EFFICIENCY
P = MC = MINIMUM ATC
Product efficiency
Price of product covers cost
IN THE LONG RUN
Neither are achieved
Production occurs above minimum ATC and price exceeds the marginal cost
Gap between perfect efficiency and long run inefficiency = excess capacity
Exess capacity = Inefficient Quantity - Perfect Quantity
Efficiency loss = area of acd: SEE
LINK
P = MC
Allocative efficiency
Correct amount of resources have been allocated to the production of the product
VARIETY
BENEFITS OF PRODUCT VARIETY
Only benefits consumers as encourages new tech and improvements to be made to existing products and designs
MORE VAREITY = MORE EXCESS CAPACITY
Increased chance to satisfy more demands