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Lecture 10

ECON101 Lecture Notes - Lecture 10: Monopolistic Competition, Root Mean Square, Strategic Dominance


Department
Economics
Course Code
ECON101
Professor
Mesbah Sharaf
Lecture
10

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CH 10 Monopolistic Competition & Oligopoly
Conditions of Monopolistic Competition
Large number of sellers!1.
There is free entry & exit!2.
Product dierentiation !3.
Physical dierences (i.e. package design) !A.
Location!B.
Service!C.
Each firm can set its own price!4.
!
Profit
P > ATC!
TR > TC
Loss
P < ATC!
TR < TC
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Breakeven
P = ATC!
TR = TC!
Monopolistic Competition in the Long Run
Due to free entry & free exit...
In the long run, monopolistic competition firm will be in equilibrium at breakeven!
!
If there are profits...
New firms will enter!
The new firms take some of the existing firms customers!
The demand on the original firms products will decrease until profits disappear!
!
If there are losses...
Some existing firms will exit!
Their customers switch to remaining firms!
The demand on the original firms products will increase until the loss disappears !
!
Ecient Scale
Full Capacity: the quantity at which the long run ATC is at its minimum !
Excess Capacity: the monopolistic firm will produce a quantity less than the full capacity !
!
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