ECON 10a Chapter Notes - Chapter 16: Monopolistic Competition, Perfect Competition, Oligopoly

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Competition with differentiated products: the monopolistically competitive firm in the short run and the long run. Equilibrium: the long run equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways. First, each firm in a monopolistically competitive market has excess capacity. That is, it chooses a quantity that puts it on the down ward sloping portion of the average total cost curve. Second, each firm charges a price above marginal cost: monopolistic versus perfect competition, monopolistic competition does not have all the desirable properties of perfect competition. There is the standard deadweight loss of monopoly caused by the makeup of price over marginal cost. In addition, the # of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policymakers to correct these inefficiencies is limited.

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