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Chapter 16

Chapter 16 Economics.docx

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Economics 10a
Gregory Mankiw

Chapter 16 Economics: Monopolistic Competition • Oligopoly: a market structure in which only a few sellers offer similar or identical products o Concentration ratio: the percentage total output in the market supplied by the four largest firmsindustries have oligopolies when the concentration ratio is significantly above 50% o Few sellers in the market makes rigorous competition less likely and strategic interactions more important • Monopolistic competition: a market structure in which many firms sell products that are similar but not identical o Each firm has a monopoly over the product that it makes, but there are substitutes that compete for the same customers o Conditions:  There are many sellers  Each firm faces a downward sloping demand curve because the products are slightly different  Firms can enter or exit the market without restrictionthe number of firms in the market adjusts until economic profits are driven to zero • Short Run: o Because the product is different, monopolistic competition has a downward sloping demand curve o Profit maximization like a monopolist: It chooses to produce the quantity at which MR=MC, using the demand curve to find the price at which it can sell that quantity • Long Run: o As in monopoly, Price>MCprofit maximization requires MR=MC & downward sloping demand curve makes MRMC because the firm has some market power o The zero-profit condition ensures only that P=ATC, not that P=MC o In the long-run equilibrium, monopolistically competitive firms operate on the declining portion of their ATC curves, so MCMC causes some consumers who value the good at more than the MC but less than the P will not buy the good o To enforce MC pricing, policymakers would have to regulate all firms that produce differentiated productsadministrative burden would be too overwhelming o Policy makers have decided to allow the inefficiency of monopolistically competitive pricing because requiring them to make price=MC would require them to operate at losses, which the govern
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