ECO-4 Lecture Notes - Lecture 27: Product Differentiation, Car Rental, Monopolistic Competition

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Marginal revenue equals marginal cost & charges price that buyers are willing to pay for that quantity (similar to single-price monopoly) Key difference is in long run :zero economic profit. As a firm earns economic profit, more firms enter the market. Demand and marginal revenue for the firm therefore decreases = zero economic profit. If firm is incurring economic loss, exit will occur = demand curves shift rightwards = zero economic profit. When all firms are making economic profit = no incentive for new firms to enter. Two key differences in mc & pc. A firm has excess capacity if it produces below its efficient scale : quantity @ which average total cost is a minimum the quantity @ the bottom of the u-shaped atc curve. Atc is lowest possible only in perfect competition b/c of perfectly elastic demand. They could sell more by cutting their prices, but they would then incur losses.

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