ECO101H1 Lecture Notes - Monopolistic Competition, Perfect Competition, Demand Curve

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16 Oct 2011
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Topic 11 Monopolistic Competition
(Week ten Nov 24th)
Outline:
1. Monopolistic Competition VS Perfect Competition;
2. Short-run VS Long-run;
3. Entry of New Firms;
4. Imperfect Competition Summary
Monopolistic Competition VS Perfect Competition
Monopolistic Competition
Perfect Competition
e.g. Family Restaurant
e.g. Wheat Farmers
Many Firms
Many Firms
Differentiated Product
Identical Product
Downward-Sloping Demand (MR<P)
Perfectly elastic demand curve (MR=P)
Advertising
No Incentive to Advertise
Free Entry/Exit
Same
No economic profit in the long run
Same
P=ATC in the long run,
ATC is not necessarily at its minimum
P=ATC in the long run,
and ATC is at its minimum
Short-run VS Long-run
1. Firm maximize profit where MR=MC
2. In the short-run:
-- zero profit (P=ATC);
-- economic profit (P>ATC);
-- economic loss (P<ATC);
3. In the long-run:
-- Firms earn zero economic profit (P=ATC) due to freedom of entry/exit
-- If firm are earning economic profits, entry of new firms shifts demand curve to the left;
-- note the difference: in perfect competition, entry of new firms shifts supply curve to the right.
Entry of new firms: details
Example: 20 pizza shops.
Q Quantity
Price
PPrice
ee
DD
MR
MC
P
ATC
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