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Lecture 19

Lecture 19-Monopolistic Competition

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University of Toronto St. George
Jack Carr

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 (PATC => 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 Observations: (i) there is no supply curve (since firms face downward-sloping demand curves) (ii) Unlike perfect competition, entry of new firms does not shift supply curve to right Monopolistic Competition: Long-Run Equilibrium 1. P1 < P (due to leftward shift of DD to DD1 and leftward shift of MR to MR1) 2. 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) Ù Excess Capacity (2) P>MC (unlike perfect competition) [Tradeoff: allocative inefficiency versus greater product variety] Imperfect Competition: Firms face downward-sloping demand curves 1) Monopoly Ù 2) Oligopoly Have some degree of market power (ability to 3) Monopolistic Competition raise price without losing all clients) Perfect Competition Firm faces perfectly elastic demand curve => no market power (would lose all customers if increased price) P1 DD1 Q1 MC MR1 ATC Demand curve has shifted leftward P = ATC Monopolistic Competition Example: Family Restaurant 1. Many Firms 2. Differentiated Products (1) Downward-Sloping demand curve (MRATC) Suffer economic loss (P
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