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Monopolistic Competition

Monopolistic Competition. Chapter 17 Pages 373-386. Number of Firms. Many. Firms. Type of Products. One. Few. Differentiated. Identical. Firm. Firms. products. products. Monopolistic. Perfect. Oligopoly P > MC. Monopoly P > MC. Competition P > MC. Competition P = MC.

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Monopolistic Competition

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  1. Monopolistic Competition Chapter 17 Pages 373-386

  2. Number of Firms Many Firms Type of Products One Few Differentiated Identical Firm Firms products products Monopolistic Perfect Oligopoly P > MC Monopoly P > MC Competition P > MC Competition P = MC Wheat market: (closest to theory) • Tap water • Wireless • Hair Salons • • Electricity • Automobiles Airlines • Restaurants Coffee Shops 4 Market Structures • •

  3. Monopolistic Competition Market Characteristics: • Many Sellers • Differentiated Products [not identical, but similar] • RelativelyEasy to enter/exit industry (most important characteristic!) • Reasonably complete information • Some price control Most common market structure in USA: coffee shops, restaurants, hair salon, auto repair, etc…

  4. Monopolistic Competition • Firms produces a product that is slightly differentiated • Firms face a downward-slopingdemand curve • therefore, P > MR • Short Run:Economic Profit or Loss can exist • Long Run: economic profit must = ZERO • Due to easy entry/exit & large number of firms

  5. MC Firm can earn profit in SHORT RUN ATC P ATC D MR Q Monopolistic CompetitionShort Run Equilibrium Price E1 Quantity 0

  6. Short Run Profit Will Not Last • Profit encourages new firms to enter the market New firms entering leads to: • Demand Curve shifts left • As your firm sells less! 2) Profit Declines 3) Entry stops when profit = zero

  7. Remember: New entry shifted The demand curve left MC ATC P = ATC D MR Profit-maximizing quantity Monopolistic CompetitionLong Run Equilibrium Price The demand curve is now tangent to the ATC curve And this tangency lies vertically above the intersection of MR and MC Economic Profit = ZERO 0 Quantity

  8. Worksheet • Monopolistic Competition

  9. MC MC ATC ATC P P D = MR MR Demand Q Q = Efficient Efficient scale Scale - Gap betweenefficient scale production & qty produced Long Run Equilibrium Monopolistically Competitive Firm Perfectly Competitive Firm Price Price Qty Quantity 0 0

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