ECON 1B03 Lecture Notes - Lecture 16: Monopolistic Competition, Oligopoly, Longrun

• School: McMaster University
• Department: Economics
• Course: ECON 1B03
• Professor: Hannah Holmes

Document Summary

If firms are earning economic profit in the sr, new firms will be encouraged to enter the market: this increases the amount of products offered, which thereby reduces the demand for each firms" products, firms will continue to enter the market until the demand curve for each firm is tangent to atc where q is set (mr=mc), the price is therefore set at atc. In the long run, monopolistic competitions behave like perfect competitions: firms are earning zero economic profit, therefore there is no reason to enter or exit the market, p is set where q (based on where mc = mr) meets demand and atc (which are tangent to each other), product differentiation. Advertising: very important for firms in a monopolistic competition, critics, it manipulates peoples" tastes, it impedes competition, defenders, it provides information to customers, it increases competition, the willingness to advertise signals the quality of the product, not only what is in the advertisement.