ECO100Y5 Chapter Notes - Chapter 11: Product Differentiation, Market Power, Monopoly
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ECO100Y5 Full Course Notes
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Firms have some power over setting price because of product differentiation. Leads to establishment of brand names and advertising. Can raise price, even if competitors do not, without losing all of its sales (monopolistic) However, each firm"s market power is severely restricted in both the short-run and in the long-run. Sr: presence of similar products (demand curve is very elastic) Lr: free entry permits new firms to compete away the profits of existing firms (competition) Total demand shared, therefore smaller share of total market. Dd shifts left as entry continues until profits are eliminated (mc=lrac), firms are maximizing its profits, but it"s profit = 0. M. c. forces each firm into a position in which it has excess capacity; that is, each firm is producing an output less than that corresponding to the lowest point on its long-run average cost curve.
