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November 12 Lecture Notes EC 110

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EC 110
Kent Zirlott

Key: Examples Formula Emphasis Definition Notes Reference 1) Between Monopoly and Competition a. Two Extremes i. Perfect competition: many firms, identical products ii. Monopoly: one firm b. In between these extremes: imperfect competition i. Oligopoly: only a few sellers offer similar or identical products 1. Nationwide Cell Phone Service 2. Game console makers ii. Monopolistic competition: many firms sell similar but not identical products c. Characteristics i. Many sellers ii. Product differentiation iii. Free entry and exit Perfect Competition Monopolistic competition Number Of Sellers Many Many Free Entry/Exit? yes Yes Long Run Econ Profits zero Zero The Products Firms Sell identical Differentiated None, price taker yes Firm Has Market Power? D Curve Facing Firm Horizontal Downward Sloping Monopoly Monopolistic competition Number Of Sellers One Many No Yes Free Entry/Exit? Long Run Econ Profits Positive Zero Firm Has Market Power? Yes yes D Curve Facing Firm Horizontal Downward Sloping Close Substitutes? None Many d. Short Run/Long Run i. Short Run: Under monopolistic competition, firm behavior is very similar to monopoly ii. Long Run: In monopolistic competition, entry and exit drive economic profit to zero 1. If profits in the short run: a. New firms enter the market, taking demand away from existing firms (demand curve shifts left), prices and profits fall b. Supply curve does not shift i. The products are different 2. If losses in the short run: a. Some firms exit the market, remaining firms enjoy higher demand (the demand curve shifts to the right) and higher prices e. Why Monopolistic Competition Is Less Efficient than Perfect Competition i. Excess Capacity 1. The monopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than the cost-minimizing output 2. A failure 3. Under perfect competition, f
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