Economics Micro & Macro (CliffsAP)

Figure 10-7

In these figures, x consumers are paying a higher price than y consumers because of price discrimination. Marginal cost
remains the same for both illustrations; the only thing that is changing is consumer groups and pricing. Y consumers
have a more elastic demand curve than x consumers.

Price discrimination, or “dumping,” is a strategy used by many domestic firms in the international market. Price dis-
crimination occurs when an identical product is sold internationally for a lower price than what is charged domestically
for the same product. Domestic producers do this to reduce excess and maximize profits.

Monopolistic Competition

Monopolistic competition is a little like a monopoly in that each firm in this market organization produces a somewhat
unique product. This uniqueness gives the monopolistically competitive firm a “mini-monopoly” over its competitor.
So, like a monopolist, the monopolistically competitive firm has a downward-sloping demand curve. Marginal revenue
for this type of firm is below the demand curve, and price is greater than marginal cost. The main distinguishing point
between monopolistic competition and a monopoly is the ease of entry. Anytime firms in a monopolistic competition
are earning above normal profit, ease of entry continues until the profit level returns to normal in the long run.

Firms in a monopolistic competition use product differentiation more so than price as a form of competition. They
attempt to provide a product for all tastes and preferences. Even though the market may not be thriving at the moment,
monopolistically competitive firms continue to introducing variety. Monopolistically competitive firms can thrive when
the market is not expanding by simply introducing new variations of products.

When a new product is available for consumers, the demand curve for close substitutes shifts to the left because less of
the total market is available for each product. To counteract this effect, other firms must first accept the new market de-
mand structure and then introduce variations of their own, pulling the demand curve back to the right.

Number of Sellers

Monopolistically competitive firms have a large presence in the U.S. economy, although not as large a presence as per-
fectly competitive firms. These firms have small market shares that allow them to fluctuate in product variety. While
collusion is unlikely, firms are forced to compete using price and non-price methods. These methods are decided upon
by the monopolistically competitive firm and do not require market consideration.

Type of Product

Monopolistically competitive firms can produce products with slightly different physical features. For example, cloth-
ing stores offer clothes; however, they offer a large variationof clothes. This variation is what provides monopolisti-
cally competitive firms with leverage in making economic decisions.

Quantity

Marginal

Cost

Consumers x Consumers y

DD

MR

MR

MC

Px

Price/Cost P

y

Part III: Microeconomics