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Topic 11 - Monopolistic Competition & Oligopoly.docx

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Department
Economics
Course
Economics 1021A/B
Professor
Arvin Dar
Semester
Winter

Description
Topic 11 – Monopolistic Competition and Oligopoly 1. Introduction for monopolistic competition 2. Possible SR equilibrium for monopolistic competition 3. LR equilibrium for monopolistic competition and excess capacity theorem 4. Some notes for oligopoly 1. Introduction for monopolistic competition Many sellers (although not as many as under perfect competition) Easy entry. Heterogeneous (differentiated) product Slightly flatter demand curve (fairly elastic) If you raise the price, there is less demand. But, there are always people willing to buy the higher price (In perfect competition, demand was horizontal – raise price = sell nothing. Low price = dumb) Monopolistic – limited monopolistic power Competition – the product is heterogeneous (if you don’t like this company’s, you can leave) Easy entry – not part of monopoly (you can’t just walk up and start a new stamp place) “Competitive market structure” usually means perfect competition 2. Possible SR equilibrium for monopolistic competition There are three possibly short run equilibria for a firm operating under monopolistic competition, one where the firm makes positive economic profits, one where the firm makes zero economic profits, one where the firm makes negative economic profits. In the latter case, the firm may or may not operate. Positive Zero Negative – Open Negative – Close Lose less when you shut down These are the same diagrams as the ones for perfect competition and monopoly :3 3. LR equilibrium for monopolistic competition and excess capacity theorem Because there is very easy entry, when firms are making positive economic profits, more people are going to want to join in the industry (i.e. gas or pizza)  Demand curve for 20 competitors  Demand curve for 30 competitors It doesn’t matter what price you pick, your quantity is seriously going to be affected. Re
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