ECO101H1 Lecture 19: Lecture 19-Monopolistic Competition

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copperclam445

1 Aug 2010

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Monopolistic Competition

1. Firms maximize profits where MR=MC

2. Short-Run

Firm may:

Earn zero economic profit (P=ATC)

Earn economic profit (P>ATC)

Suffer economic loss (P<ATC)

3. Long-Run

Firms earn zero economic profit (P=ATC) Due to freedom of entry/exit

Monopolistic Competition: Entry of New Firms

Suppose

20 pizza shops

Each has 1/20th RI³PDUNHW´

Each earn economic profit

Result

10 new pizza shops open (no barriers to entry)

Each has 1/30th RIWKH³PDUNHW´

Demand curve shifts to the left

Ù Each of initial shops has 1/30th RIWKH³PDUNHW´

Ù Demand curve of initial shops have shifted leftward

Monopolistic Competition: Short-Run Equilibrium

1. P>ATC => economic profits

2. No barriers to entry => new firms enter industry

3. New firs enter industry => DD shifts leftward

ATC

Economic

profits

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Monopolistic competition: firms maximize profits where mr=mc, short-run. Suffer economic loss (p=atc) (p>atc) (patc => economic profits, no barriers to entry => new firms enter industry, new firs enter industry => dd shifts leftward. Observations: (i) (ii) there is no supply curve (since firms face downward-sloping demand curves) Unlike perfect competition, entry of new firms does not shift supply curve to right. Mr1: p1 < p (due to leftward shift of dd to dd1 and leftward shift of mr to mr1, excess capacity: q1 is lower than output at which atc is at a minimum. Results (1) firms do not produce at minimum atc (unlike perfect competition) Have some degree of market power (ability to raise price without losing all clients)

Related Questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden

magentabee19

Monopolistically competitive firms

a.	are guaranteed to earn a short-run economic profit
b.	may earn short-run economic profits, although long-run economic profit is typically zero
c.	may earn economic profit both in the short run and in the long run
d.	earn zero economic profit both in the short run and in the long run
e.	can only earn an economic profit in the inelastic portion of their demand curves

turquoisebee879

In a competitive market with identical firms,

a.; free entry and free exit into the market require that firms earn zero economic profit in the long run even though they may be able to earn economic profits in the short run.

b. firms can earn economic profits in the long run if the long-run supply curve is upward sloping

c. an increase in demand in the short run will result in a new price above the minimum of the average total cost allowing the firms to earn a positive economic profit in both the short run and the long run

d. firms can earn a positive economic profit in either the short run or the long run.

pinkwombat37

ECO101H1 Lecture 19: Lecture 19-Monopolistic Competition

ECO101H1 Full Course Notes

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