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Lecture 14

ECON 20A Lecture 14: Lecture 14
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Department
Economics
Course
ECON 20A
Professor
William Branch
Semester
Winter

Description
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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