Chapter 11

Chapter 11 - Chapter 11 Theory of monopolistic competition:...

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Chapter 11 Theory of monopolistic competition: o Many seller and buyers o Slightly differentiated product o Easy entry and exit Examples of monopolistic competition: retail clothing, computer software, restaurants, service stations Monopolistic competitor’s demand curve is downward sloping Substitutes exits, but not perfect substitutes Has to lower price to sell an additional unit of the good it produces P > MR Produces quantity of output at which MR = MC P > MC Profits in the Long Run? o If economic profits are being earned, new firms will enter the industry. Reduce demand that each firm faces → demand curve shift to left o If economic losses are being incurred → firms will leave the industry o Economic profits will equal zero in the long run Exhibit 1 pg.270 Exhibit 2 pg. 271 Excess capacity Theorem – a monopolistic competitor in equilibrium produces an output smaller than the one that would minimize its unit costs of production In the long-run equilibrium, when the monopolistic competitor earns zero
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Chapter 11 - Chapter 11 Theory of monopolistic competition:...

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