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Lecture 13

Economics 1021A/B Lecture Notes - Lecture 13: Perfect Competition, Monopolistic Competition, Market Power


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Lecture
13

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Chapter 14: monopolistic competition
Monopolistic competition:
oMarket structure
Large number of firms
No one firm is big enough to influence the market
Concerned with average prices
Not paying too much attention on what their competitors are doing
No point in collusion or cooperation
Each firm produces differentiated product
Product differentiation
oThe more that they can differentiate the product, the more
pricing power they get, less elasticity you can generate
Firms compete on product quality, price and marketing
Quality = design, reliability, service
Demand is downward sloping
Tradeoff between price and quality
2 forms of marketing
oAdvertising and packaging
Firms are free to enter and exit
No barriers to entry in monopolistic competition
Firms cant make economic profit in the long run
Firms short run output and price decision
oChoose quality
oChoose marketing program
oChoose profit maximizing quantity, MR = MC
Might lead to loss in the short run
Long run
Profit = entry
P>ATC = entry
Monopolistic competition vs perfect competition
oExcess capacity
Firms being able to product at minimum average total cost
oMarkup
P – MC = markup
Monopolistic competition efficient?
oP=MSB
oMC =MSC
oP>MC, MSB>MSC
oNot efficient
Product development and marketing
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