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Chapter 13

ECO2023 Chapter Notes - Chapter 13: Demand Curve, Product Differentiation, Marginal Cost

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John Slattery

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Microeconomics Chapter 13 Monopolistic Competition the Competitive Model in a More Realistic Setting
Monopolistic Competition – a market structure in which barriers to entry are low and many firms
compete by selling similar, but not identical, products
13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market
oThe Demand Curve for a Monopolistically Competitive Firm
See Text
oMarginal Revenue for a Firm with a Downward-Sloping Demand Curve
A monopolistically competitive firm must cut the price to sell more
Marginal revenue curve will slope downward and will be below the demand
Average Revenue is always equal to price
Every Firm that has the ability to affect the price of the good or service it sells will have a
marginal revenue curve that is below its demand curve
Only firms in perfectly competitive markets which can sell as many units as they want at
the market price, have marginal revenue curves that are the same as their demand
The additional revenue received from selling one more burrito is smaller than the
revenue lost receiving a lower price in the product that could have been sold at the
original price
13.2 How a monopolistically competitive Firm Maximizes Profit in the Short Run
oAll firms use the same approach to maximize profit
Produce the quantity where marginal revenue is equal to marginal costs
In the short run, at least one factor of production is fixed, and there is not enough time
for new firms to enter the market
Firm’s marginal cost is the increase in total cost resulting from producing another unit of
Profit = (P-ATC) XQ
In a monopolistically competitive firm will maximize profits by producing P>MC
13.3 What Happens to Profits in the Long Run?
oHow Does the Entry of New Firms Affect the Profits of Existing Firms?
When new firms enter the market, the demand curve for another will shift left
The original firm’s demand curve will be more elastic
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In the long run, at the point where the demand curve is tangent to the average total
cost curve, Price is equal to the average total cost, the firm is break even, and it no
longer earns an economic profit
In the long run, the demand curve is also more elastic because the more restaurants
there are in the area, the more sales a restaurant will lose to other restaurants if the
price raises
oIs Zero Economic Profit Inevitable in the Long Run
Long run shows the effects of market forces over time.
Owners of Monopolistically competitive firms do not have to accept the long run result
To earn an economic profit, it is to sell differentiated product or find a way of
producing an existing product at a lower cost
If a monopolistically competitive firm selling a differentiated product is earning a profit
Profit will attract the entry of additional firms
Entry of those firms will eventually eliminate the firm’s profit.
If a firm introduces new technology that allows it to sell a good or service at a lower
cost, competing firms will eventually duplicate that technology and eliminate the firm’s
Only if the firm stands still and fails to find new ways of differentiating its
product or fails to find new ways of lowering the cost of producing a product
To stay one step ahead of competitors, a firm has to offer consumers goods or services
that they perceive to have greater value than those competing firms offer
Value can take the form of product differentiation that makes the good or
service more suited to consumers’ preferences, or it can take form of a lower
13.4 Comparing Monopolistic Competition and Perfect Competition
oTwo important differences between long-run equilibrium in a monopolistic competition and
perfect competition
Monopolistic competitive firms charge a price greater than marginal costs
Monopolistically competitive firms do not produce at minimum average total costs
oExcess Capacity Under Monopolistic Competition
In a perfectly competitive market faces a perfectly elastic demand curve that is also its
marginal revenue curve
A firm maximizes profit by producing the quantity where price equals marginal
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