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AGEC 200 (18)


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McGill University
Agricultural Economics
AGEC 200
Anwar Naseem

- 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 P = $0.25, P = $1.00, MU = 1, MU = 2
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