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LEADING ECONOMIC INDICATOR: One of eleven economic statistics that tend to move up or down a few months before the expansions and contractions of the business cycle. These leading indicators are -- manufacturers new orders, an index of vendor performance, orders for plant and equipment, Standard & Poor's 500 index of stock prices, new building permits, durable goods manufacturers unfilled orders, the money supply, change in materials prices, average workweek in manufacturing, changes in business and consumer credit, a consumer confidence index, and initial claims for unemployment insurance. Leading indicators indicate what the aggregate economy is likely to do, business-cycle-wise, 3 to 12 months down the road. When leading indicators rise today, then the rest of the economy is likely to rise in the coming year. And when leading indicators decline, then the economy is likely to decline in 3 to 12 months.
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                           MONOPOLISTIC COMPETITION, EFFICIENCY: A monopolistically competitive firm generally produces less output and charges a higher price than would be the case for a perfectly competitive firm. In particular, the price charged by a monopolistically competitive firm is higher than the marginal cost of production, which violates the efficiency condition that price equals marginal cost. A monopolistically competitive firm is inefficient because it has market control and faces a negatively-sloped demand curve. Monopolistic competition does not efficiently allocate resources. The reason for this inefficiency is found with market control and negatively-sloped demand curve. The negative slope means that the price charged by the monopolistically competitive firm is greater than marginal revenue. As a profit-maximizing firm that equates marginal revenue with marginal cost, the price charged by monopolistic competition is also greater than marginal cost. The inequality between price and marginal cost is what makes monopolistic competition inefficient.Because price exceeds marginal cost, the economy gives up less satisfaction from other goods not produced than it receives from the good that is produced. The economy can gain satisfaction by producing more of the good. However, in the grand scheme of things, monopolistic competition is not the worst offender when it comes to efficiency. Because the demand curve facing a monopolistically competitive firm (with minimal market control) tends to be relative elastic, the difference between price and marginal revenue is relatively small. This means that the difference between price and marginal cost, and the degree of inefficiency, is also relatively small. Inefficient Profit Maximization| Inefficiency |  |
Consider the production and sale of Deluxe Club Sandwiches, a tasty luncheon meal produced for the residents of Shady Valley by the hypothetical monopolistically competitive firm, Manny Mustard's House of Sandwich.A typical profit-maximizing output determination using the marginal revenue and marginal cost approach is presented in this diagram. Manny maximizes profit by producing output that equates marginal revenue and marginal cost, which is 6 sandwiches. The corresponding price charged is $4.95. This profit-maximizing production is not efficient. In particular, the price is $4.95, but the marginal cost is only $4.65. Society is producing and consuming a good that it values at $4.95 (the price). However, in so doing, society is using resources that could have produced other goods valued at $4.65 (the marginal OPPORTUNITY cost). Society gives up $4.65 worth of value and receives $4.95. This is a good thing. It is so good, that society should do more. However, the monopolistically competitive firm is not letting this happen. Manny is not devoting as many resources to the production of Deluxe Club Sandwiches as society would like. An Efficient AlternativeThe degree of monopolistic competition inefficiency can be illustrated with a comparison to perfect competition. Such a comparison is easily accomplished by clicking the [Perfect Competition] button in the exhibit above. A primary use of perfect competition is to provide a benchmark for the comparison with other market structures, such as monopolistic competition.A comparison between monopolistic competition and perfect competition indicates: - Monopolistic competition produces less output than perfect competition. In this example, monopolistic competition produces 6 sandwiches compared to slightly more than 6 sandwiches for perfect competition. Manny is not allocating enough resources to the production of Deluxe Club Sandwiches.
- Monopolistic competition charges a higher price than perfect competition. In this example, the monopolistically competitive price is $4.95 versus about $4.93 for perfect competition. Manny is NOT efficient because he produces a quantity in which price is greater than marginal cost.
Monopolistic competition is clearly inefficient. However, in the big scheme of all things inefficient, this is not a particularly series case of inefficiency. Yes, the price is higher and the quantity is less. Yes, marginal cost is less than price. But, a difference of $0.02 between the perfect competition price and the monopolistic competition price does not seem to be excessive. And, it could be a whole lot worse with another market structure such as monopoly.While an evaluation of the relative good or bad of inefficiency is a value judgement falling in the realm of normative economics, such a judgement is worth considering. The reason is that inefficiency in the real world is a matter of degree. Some inefficiency is really severe and some is not. Considering the fifth rule of imperfection that nothing is perfect and never will be, it is important to consider the degree of inefficiency when interest turns to remedial actions, that is, economic policies and government intervention. While a monopoly that charges a $10 price while incurring a marginal cost of $2 creates a serious inefficiency problem that probably warrants government intervention, a monopolistically competitive firm that charges a $4.95 price while incurring a marginal cost of $4.65, might not. Consider that government policies fall victim to the fifth rule of imperfection, too. Any corrective action by government might actually worsen efficiency rather than achieving it. While government "probably" would not do worse than a really bad monopoly, it is very likely to do worse than a not-so-bad monopolistically competitive firm.
Recommended Citation:MONOPOLISTIC COMPETITION, EFFICIENCY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2023. [Accessed: March 25, 2023].
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RED AGGRESSERINE
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Today, you are likely to spend a great deal of time looking for a downtown retail store seeking to buy either a pair of leather sandals that won't cause blisters or clothing for your kitty cats. Be on the lookout for broken fingernail clippers.
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Lewis Carroll, the author of Alice in Wonderland, was the pseudonym of Charles Dodgson, an accomplished mathematician and economist.
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"Success is the ability to go from one failure to another with no loss of enthusiasm." -- Sir Winston Churchill
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AVC
Average Variable Cost
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