Monopolistic Competition. The Market for Chinese Food in NYC

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Blaze Miles
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1 Chinese Food Funeral Services Monopolistic Characteristics of Monopolistic 1. Many sellers 2. Product differentiation 3. Free entry and exit The Market for Chinese Food in NYC 1. Many sellers: Citysearch lists 1,832 Chinese restaurants in NYC 2. Product differentiation: For people who want it spicy Kosher fast bland 3. Free entry and exit: restaurants are constantly opening and closing. 1

2 Cost Rating $ $ (under $20) $$ ($21-$30) $$$ ($31-$40) $$$$ (above $40) Source: CitySearch (21 reviews) (9 reviews) (1 reviews) (7 reviews) (2 reviews) Source: CitySearch Differentiated Products Each Chinese restaurant produces meals that are slightly different from those of other Chinese restaurants. Rather than being a price taker, each Chinese restaurant faces a downward-sloping demand curve. Free Entry or Exit Firms can enter or exit the market without restriction. The number of firms in the market adjusts until economic profits are zero. 2

3 ($ per meal) D P = MR D Qπ 3

4 Over the last few years, a large number of Chinese from Fujian Province have been smuggled into New York City. Their desperation makes them highly desirable as laborers (NYTimes, 7/22/2001). Indeed, signs litter the windows of Chinese restaurants advertising jobs for hardworking Fujianese, including the front window of the Silk Road Palace. Total Revenue = A+B Total Cost = B Econ Profits = A 2 P 2 (Qπ 2 ) A 2 B MR D Qπ 2 4

5 Short-run economic profits encourage new Chinese Restaurants to enter the market. This: Increases the variety in Chinese meals. Reduces demand faced by restaurants already in the market. Incumbent restaurants demand curves shift to the left. Demand for the incumbent restaurants meals fall, and their profits decline. The Long-Run Equilibrium Chinese restaurants will enter and exit until the firms are making exactly zero economic profits. 5

6 2 P 3 = 2 The demand curve is tangent to the curve. And this tangency lies vertically above the intersection of MR and. MR 3 D 3 Qπ 3 There are two noteworthy differences between monopolistic and perfect competition: Excess capacity Markup over marginal cost 6

7 2 P 3 = 2 The demand curve is tangent to the curve. And this tangency lies vertically above the intersection of MR and. MR 3 D 3 Qπ 3 Excess Capacity Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm.. In monopolistic competition, output is less than the efficient scale of perfect competition. 7

8 (a) Monopolistically Competitive Firm (b) Perfectly Competitive Firm P P = P = MR (demand curve) MR Demand 0 produced Efficient scale 0 produced = Efficient scale Markup over Marginal Cost For a competitive firm, price equals marginal cost. For a monopolistically competitive firm, price exceeds marginal cost. 8

9 (a) Monopolistically Competitive Firm (b) Perfectly Competitive Firm Markup P Marginal cost MR Demand P = P = MR (demand curve) 0 produced 0 produced Monopolistic and the Welfare of Society There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost. However, it may be that people are willing to incur the cost to have the greater variety offered by monopolistically competitive markets. 9

Monopolistic Competition

Monopolistic Competition In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what