Textbook Notes (369,198)
Canada (162,457)
Economics (752)
ECON 1B03 (303)
Chapter 16

Chapter 16

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Usman Hannan

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CHAPTER 16: MONOPOLISTIC COMPETITION Between Monopoly and Perfect Competition - imperfect competition when firm fall in between these polar cases - oligopoly: a market structure in which only a few sellers offer similar or identical products - concentration ratio: how economists measure a market’s domination by a small number of firms > percentage of total output in the market by the 4 largest firms - in Canada most industries have a four0firm concentration ratio under 50%, but some play bigger soles (examples: breakfast cereal (83%), aircraft manufacturing (85%), electric lamp bulbs (89%), household laundry equipment (90%), cigarettes (99%)) - monopolistic competition: a market structure in which many firms sell products that are similar but not identical > 1) many sellers – many firms are competing for the same group of customers 2) product differentiation – each firm produces a product that is at least slightly different from those of other firms, therefore faces a downward sloping demand curve (price maker) 3) free entry and exit – no restrictions to enter or exit - oligopoly make strategic interactions vitally important Competition with Differentiated Products The Monopolistically Competitive Firm in the Short Run - acts as a monopoly in the short run > has a downward sloping demand curve and follows the rules of profit maximization as a monopoly does The Long-Run Equilibrium - profit encourages entry, and therefore shifts the demand curve left which leads to declining profit - process of entry and exit will continue until the firms are making exactly zero economic profit - the demand curve must be tangent to the ATC curve - as in a monopoly market, price exceeds marginal cost (profit maximization) - as in a competitive market, price equals average total cost (drives economic profit to 0) Monopolistic vs. Perfect Competition Excess Capacity - monopolistic firms produce quantities at the downward sloping section to the ATC curve, competitive firm produces at the minimum of the curve - monopolistic firms produce below the efficient sc
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