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Lecture

Chapter 12 Notes

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Department
Economics
Course Code
ECON 2001.01
Professor
All

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Chapter 12 INTRO ­Remember that in a perfectly competitive market: 1. There are many firms 2. All firms  sell identical products 3. There are no barriers to new firms entering the industry ­The coffeehouse market is monopolistically competitive because the products Starbucks  and its competitors sell are differentiated rather than identical. So numbers one and three  are true, but two is not ­Most monopolistically competitive markets are unable to earn economic profits in the  long run ­Monopolistic competition: A market structure in which barriers to entry are low and  many firms compete by selling similar, not identical, products. 12.1 ­Because changing the price affects the quantity of cafe lattes sold, a Starbucks store will  face a downward­sloping demand curve rather than the horizontal demand curve that a  wheat farmer faces ­A monopolistically competitive firm must cut the price to sell more, so its marginal  revenue curve will slope downward and below its demand curve. ­Average Revenue: total revenue divided by quantity ­Average revenue equals price ­When a firm cuts the price, it sells one more café latte (output effect) but receives 50  cents less for each café latte it could have sold at the higher price (price effect) ­Every firm that has the ability to affect the price of the good or service it sells will have a  marginal revenue curve that is below its demand curve 12.2 ­To maximize profits, firms produce where marginal revenue is equal to marginal cost ­A firms marginal cost is the increase in total cost resulting from produce another unit of  output ­Profit=(p­ATC)xQ ­A monopolistically competitive firm will maximize profits where p>MC 12.3 ­As long as Starbucks is making a profit, there is an incentive for additional coffeehouses  to open in the area, the demand curve will always continue shifting to the left ­Eventually the demand c
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