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Lecture 14

ECON 20A Lecture 14: Lecture 14

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William Branch

Lecture 14 I. Monopolistic Competition a. Two Extremes i. Perfect Competition 1. Many firms producing identical goods 2. Firms are pricetakers with p = MC 3. Free entryexit in longrun economic profits = 0 ii. Monopoly 1. Market power derived from a single firm producing a good without a close substitute 2. A firm uses market power to earn positive profits 3. Deadweight loss experienced by society b. Towards a middle ground i. Oligopoly 1. A few firms, producing similar goods, engage in strategic interaction (compete on price or compete on quantity) ii. Monopolistic Competition 1. Many sellers each with a differentiated good (like monopoly) 2. Goods are close substitutes 3. Freeentry eventually competes profits away (like perfect competition) II. Definition of Monopolistic Competition a. Monopolistic competition is a market with i. Many sellers, each competing for the same customers; ii. Differentiated goods, i.e. products that are slightly different, but which gives firms some market power so that each firm faces a downward sloping demand curve; iii. Freeentry and exit so that the number of firms adjusts until economic profits = 0 III. Monopolistically competitive firm: Shortrun a. Each firm faces a downward sloping demand curve follow monopolists decision rule: 1. Choose Q where MR=MC, and 2. Find price on demand curve corresponding to Q. IV. Monopolistically competitive firm: Longrun a. When firms realize economic profits, new firms enter with a new product close substitute to existing ones b. New products give consumers choices, so each firm faces a lower demand for their product c. This competes away the economic profits d. Note: opposite occurs when firms realize losses e. In the graph: i. The demand curve is tangent to ATC, and that pint is the pricequantity. V. Monopolistic vs. Perfect competition
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