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5. The World of Imperfect Competition & Macroeconomics

The World of Imperfect Competition 1

Monopolistic Competition and Economic Profit 2

  • Monopolistic competition is a type of imperfect competition market structure in which a large number of firms produce similar but not identical products, this substitutes may eat the demand for the original product.
  • Monopolistic competition is more closer to perfect competition than monopoly.
  • It is hard for monopolistic competition firms to make economic profit in the long run because of the low barriers to entry and the fact that the products are similar but not identical.
  • Example: Apple is a monopoly for IPad (only Apple produces IPad) but it is a monopolistic competition for Tablets in general (many companies create tablets that are substitutes or similar to IPad, but not identical).
  • With more firms entering the market, the demand for the original product decreases, and the economic profit decreases as well.
  • The demand curve shifts to the left, the marginal revenue curve shifts to the left, and the economic profit decreases until it reaches zero.
  • Economic profit is the difference between total revenue and total cost, including both explicit and implicit costs.
  • Accounting profit is the difference between total revenue and total explicit costs.
  • While economic profit goes to zero, accounting profit can still be positive.
  • The curves for the company that is in monopolistic competition are similar to the curves for a monopoly, as other companies are not producing the same product.

Oligopolies and Monopolistic Competition 3

  • Oligopoly is a market structure in which a small number of firms have the large majority of the market share, all producing similar but not identical products.
  • Oligopoly is more similar to monopoly than monopolistic competition.
  • Oligopoly firms have a high degree of market power, but they are not price makers like monopolies (they can’t set the price).
  • Oligopoly firms are interdependent, meaning that they have to consider the actions of other firms when making decisions.
  • Oligopoly firms can collude to act like a monopoly, but this is illegal in most countries.
  • Oligopoly firms can also compete with each other, but this can lead to a price war, which is not beneficial for any of the firms.
  • Example: The airline industry is an oligopoly, with a few companies controlling the majority of the market share.

markets spectrum

Price Discrimination 4

Macroeconomics: The Big Picture 5

Introduction to Inflation 6

Real GDP and Nominal GDP 7

Winners and Losers from Inflation and Deflation 8

References

  1. Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge. Chapter 11: The World of Imperfect Competition. https://my.uopeople.edu/pluginfile.php/1894552/mod_book/chapter/527802/Principles%20Of%20Economics%20Chapter%2011.pdf ↩

  2. Khan Academy. (2012, January 30). Monopolistic competition and economic profit | Microeconomics | Khan Academy [Video]. Youtube. https://youtu.be/RUVsEovktGU ↩

  3. Khan Academy. (2012, January 26). Oligopolies and monopolistic competition | Forms of competition | Microeconomics | Khan Academy [Video]. Youtube. https://youtu.be/PzDthFTzEa0 ↩

  4. Khan Academy. (2012, January 31). Price discrimination | Microeconomics | Khan Academy [Video]. Youtube. https://youtu.be/z0wg9ZPyL38 ↩

  5. Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge. Chapter 20: Macroeconomics: The Big Picture. https://my.uopeople.edu/pluginfile.php/1894556/mod_book/chapter/527809/Principles%20Of%20Economics%20Chapter%2020.pdf ↩

  6. Khan Academy. (2012, February 14). Introduction to inflation | Inflation - measuring the cost of living | Macroeconomics | Khan Academy [Video]. YouTube. https://youtu.be/AaR1mPrdbTc ↩

  7. Khan Academy. (2012, February 10). Real GDP and nominal GDP | GDP: Measuring national income | Macroeconomics | Khan Academy [Video]. YouTube. https://youtu.be/lBDT2w5Wl84 ↩

  8. Khan Academy. (2018, February 22). Winners and losers from inflation and deflation | AP Macroeconomics | Khan Academy [Video]. YouTube. https://youtu.be/V41_kZuOE0w ↩