# AGEC 200 Lecture Notes - Marginal Utility, Monopolistic Competition, Perfect Competition

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Published on 19 Nov 2012
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- In SR, monopolistic competition can make profit or loss
- LR: D shifts to the left so that P = ATC = 0 economic profits occur
o D touches LRAC, therefore P = LRAC leading to 0 profit
o Entry and exit occurs until P = ATC and profit = zero
o Markup = difference between MC and MR (where MC > MR). When produce at output less
than ATC min (left of), and P is marked up. Unused resources are idling
o Excess Capacity: producing at higher cost curve (downward sloping section of ATC curve),
due to price at less than cost maximizing output
- Is monopolistic competition efficient?
o Choose between differentiated goods at higher P or one product at lower P? variety
o In perfectly competitive environment (any agricultural environment), there are no ads
However in monopolistic competition, because trying to increase customer base.
BUT not present for perfectly monopolistic environment b/c no need to (only one)
How do Rational consumers choose what to spend money on?
- At higher price but relatively small difference (10 000 and 10 050), rationality breaks down
Utility and Consumers
1. All goods have utiliy utility is satisfaction
a. Marginal Utility = change in utility from consumer an additional unit
2. There is no saving all income is spent
3. Marginal Utility diminishes over time (diminishing marginal utility)
To choose between X and Y? (How many for gum, how many for ice cream?)
- Depends on 1. How much you like it (utility), 2. How much it costs (price)
- Need to figure out how much extra utility (MU) will you get from spending your next \$1 on X? on
Y?
o Trying to maximize utility per \$ spent
- Compare MU to price. If Pgum = \$0.25, Picecream = \$1.00, MUgum = 1, MUice cream = 2
o Compare MU and P for all goodsagainst spending toward goods give you more MU per \$
o 
 
 , so buy more gum as it gives more happiness per dollar
- Optimal consumption bundle 
 
 
 ,
o to maximize total utility, allocate income so MU/\$ is equal for all purchases
Budget
- How to maximize utility under limited budget?
- Budget constraint shows consumption bundles that consumer can afford given his/her income
and the prices
- Every point on curve provides affordable consumption bundles that cost all your income
- Increase in income shifts budget constraint outward
- If P changes, slope of budget constraint changes
- Slope of budget = Px/Py. Slope of budget constraint = amount of gas the consumer can afford if he
gives one pizza (similar to the PPC)
- Budget Constraint: I = PxX + PyY.
o Y = I/Py PxX/Py
- From Total Utility Curve, point of maximum utility, to see what budget allows @ C (on budget line)
- Therefore consumer can trade one product for another for increased total utility. However after a
point, you will have too little of the product, resulting in decrease in total utility
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