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Lecture 19

Lecture 19-Monopolistic Competition


Department
Economics
Course Code
ECO101H1
Professor
Jack Carr
Lecture
19

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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³PDUNH
Each earn economic profit
Result
10 new pizza shops open (no barriers to entry)
Each has 1/30th RIWKH³PDUNH
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
P
DD
Q
MC
MR
ATC
Economic
profits
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