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>> Welcome back.
We're moving on into chapter nine
where we're gonna start talking first of all
about monopolistic competitions.
Well we've been starting this way with most of our types
of markets, is that to talk
about their characteristics or their tricks.
Well the three characteristics of a monopolistic competition is
that first of all lots of sellers, not as many sellers
as in a perfect competition but certainly way more
than in a monopoly or way more than one.
Second of all, the product has to be different
or it doesn't have to be different,
it has to just attempt to be differentiated.
Monopolistic competitions are things like burger joints
like Burger King, McDonalds, you know, Wendy's,
you name all the different ones that are out there.
They are obviously selling the same thing, burgers
but they advertise to try and make them sound different,
to make you want to go to Wendy's over McDonalds
because their burgers are really different even though they both
bought the same-- the beef from the exact same spot,
they bought the pickles from the exact same spot,
they made the ketchup the exact same way,
they made the mustard the exact same way,
the lettuce is exactly the same, the onions are exactly the same,
the bread is-- everything is the same, but are they?
No. Why? Because they spend money differentiating them.
That's another characteristic of a monopolistic competition
and the last one is that it's sort of easy to get in
and out of the market.
Now it's not as easy as getting in and out
of a perfect competition, right?
In a perfect competition you're growing wheat and at the end
of the season you decide whether or not you're gonna buy corn
or wheat seed the next year.
Well in a monopolistic competition,
it's still relatively easy.
I mean you still have to get--
spend a few hundred thousand dollars in order
to buy a franchise for Dairy Queen or McDonalds
or whatever type of monopolistic competition joint you wanna get
into but it's still relatively easy.
It still costs you time and it costs you money though
so it takes a little bit of effort.
Now what I'd like to do to sort of give you a feel
for what a monopolistic competition is is to compare it
to the perfect competition and the monopoly, right?
The perfect competition, perfectly elastic demand,
supply, standard cost curve, use your production
for maximizing profit.
Monopolies, you've got this nice downward sloping demand curve.
It's relatively steep because demand is inelastic
because your product is unique and there's no substitutes.
The more substitutes you have,
the more elastic your demand comes, the more it becomes
like this, perfectly elastic.
We're not, you know, we're essentially inelastic
to some degree not perfectly though,
that would be a vertical line.
So what's the merger of these two?
Well here it is or my variation on the theme, alright?
The demand curve, it's not as steep, it's more elastic, right?
Because you've got substitutes but you're trying to point
out with your advertising that you really don't.
They're not the same even though we must face it,
they essentially are, alright?
So the way you go about figuring out how to maximize profit
in a monopolistic competition,
exactly the same as everything else.
Find out where marginal revenue equals marginal cost
to produce there, that's the way you do it.
So how do you figure out where your marginal revenue is?
Well if this is your demand, okay, let's keep it
as straight line so that it makes the marginal analysis a
little bit easier.
If it's straight but not as steep,
you still find marginal revenue the same way.
You bisect the angle, cut the angle in half
that the demand curve is making, right?
So here's half of the angle, shoot that down
as your marginal revenue.
Your supply and your marginal cost are still the same thing.
Where those intersect,
that's where marginal revenue equals marginal cost.
This is your profit maximization point and your price,
just like in monopoly, you shoot up.
To get your price off the demand curve, you shoot up.
You're not gonna shoot up as far because this is splattered.
Well that's okay though.
So here's your price.
Are you making a profit at this stage?
We don't know.
What we know-- when would we be able to tell
if there was a profit?
We would need to know whether
or not what our average total cost curve is.
Well let's pretend like we are making a profit.
So let's draw average total cost and that variable cost
so that we are making a profit.
[Noise] Suppose either average total cost
and average variable cost,
here's where our price is set for this quantity.
This margin right there, that's our profit.
We're making a profit.
Well, do you always make a profit
in a monopolistic competition?
No. Sometimes you lose money.
What happens when you start losing money?
Well if you're losing money too often and too much, guess what?
Get out of the business.
Same as when you're in here,
same as when you're in here, right?
The question though is will you make a profit over the long run?
In a monopoly you can't.
In a perfect competition, no way.
In monopolistic competition,
no you're not gonna make a long run economic profit either.
Why? Because it's still sort of easy to get in and out.
Now what that means is that if we are earning this economic
profit for a little bit of time, right,
there's still a whole bunch of other people in the market
and what happens is that when other people see this
as a profit, what do they do?
They hop in.
They create their own franchise.
They create another franchise.
Maybe someone opens up and you know, even another McDonalds,
you know, three blocks away, right, doesn't mean that it's--
they are gonna compete with you even though it's the same
franchise, right?
But you're one McDonald's owner
and someone else is a different one, right?
Unless you purchase those franchising rights entirely
for the city, someone else can do it, no problem.
So you're competing with more people.
When more people get into the market, what ends up happening,
your demand starts to become more and more elastic
and what happens is that the elasticity of the demand is
such that eventually the price [pause] that winds up being set
where your demand curve and average total cost curve come
down and intersect, they're gonna be tangential.
They're gonna hit one spot and your price is gonna be right
where your average total cost curve is
and you're still gonna be lined up making no economic profit.
Now the reason why monopolistic competitions are a little bit
better is that this is only a sort of easy entry and exit.
So if you are making a profit, that profit's going
to last longer because it's gonna take people a longer time
to get into the market to start basically cutting
into your profit share, right?
So it's okay that it, you know, it's alright,
it's still a competition.
A competition means no economic profit.
There might be accounting profit, right?
Remember there's a difference between those two
but there's no economic profit, profit on top
of the opportunity cost that you're losing.
So monopolistic competition is a merger of monopolies
and perfect competition, it's really what almost every,
you know, market is out there nowadays folks.
There is differentiation in almost everything.
When you turn on the TV you can see ads for everything,
even the corn market, even the feed corn market.
It's sad, if you live in Iowa, well which I have before,
you will watch TV and end up seeing advertisement
for different types of feed corn.
It's like, "Hello, it's all the same, it's big corn."
Well that's me potentially believing that but in the end,
long run analysis, still not gonna have a profit and that's
because of this, alright?
And do realize that you are also wasting certain amount
of resources when you're working in a monopolistic competition.
I noticed that we're not producing similar towards the
bottom of our average total cost curves
because we're wasting money differentiating our products.
We're wasting resources in order to be able to do that.
So it's actually an inefficient market to be
in a monopolistic competition because we waste money trying
to get a little bit of a profit for a short amount of time.
Yeah we get that profit for a short amount of time
but we also cheat the customer
out of savings in order to do that.
Hey, you gotta earn profit some way right?
Alright, well that's monopolistic competition.
We've got one more video we're gonna talk a little bit
about oligopolies.