21 monopolistic competition oligopoly Handout

21 monopolistic competition oligopoly Handout - Market...

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1 Market Structure u Monopolistic Competition u many firms u free entry u differentiated product u optimal amount of differentiation u differentiation brings in additional revenue u differentiation increases costs u if the extra revenue is greater than the extra cost, do more u variety of goods u how products are differentiated u physical characteristics u convenience u location Monopolistic Competition u product differentiation u market power can charge a higher price and not lose all customers u seller faces downward-sloping demand curve Firm Q P Demand curves facing individual firm D u demand curve for existing firm shifts with entry or exit u demand for firm decreases with entry of another firm market demand is same firm’s share of market demand is smaller Firm Q P Demand curves facing individual firm D D 2 Other firms enter industry Monopolistic Competition
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2 u demand curve for existing firm shifts with entry or exit u demand for firm decreases with entry of another firm market demand is same Firm Q P Demand curves facing individual firm D Monopolistic Competition D 1 Other firms leave industry increases exit larger Profits Firm Q P D FIRM MC ATC MR Monopolistic Competition u short-run profit maximization u increase output if MR > MC u decrease output if MC > MR u profit maximized where MR = MC Q u price determined by demand P u decrease in existing firm’s demand Monopolistic Competition u economic profits entry of new firms u economic profit = 0 no incentive for entry Firm Q P D MC ATC MR P D ¢ MR ¢ Firms Entered Profits go down to zero Q
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3 Loss Monopolistic Competition u short-run profit maximization u profit maximized where MR = MC u price determined by demand Firm Q P D FIRM MC ATC MR Q P u increase in existing firm’s demand Monopolistic Competition u losses exit of existing firms Firm Q P ATC P D ¢ FIRM ¢ Firms Exit Profits go up to zero D FIRM Q u economic profit = 0
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This note was uploaded on 03/12/2010 for the course ECON 101 taught by Professor Gerson during the Fall '08 term at University of Michigan.

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21 monopolistic competition oligopoly Handout - Market...

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