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Lecture 21 - Announcements Reading for today text Ch 11 pp...

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11/30/2009 1 Reading for today text Ch 11 pp. 298-321 (284-306 5 th edition) Reading for Wednesday text Ch 13 pp. 354-376 (336-354 5 th edition) Announcements Market Structure Monopolistic Competition many firms free entry differentiated product 19 how products are differentiated physical characteristics convenience location optimal amount of differentiation differentiation brings in additional revenue differentiation increases costs if the extra revenue is greater than the extra cost, do more variety of goods Monopolistic Competition product differentiation market power: price-setting ability can charge a higher price and not lose all customers seller faces downward-sloping demand curve 19 P Firm Q Demand curves facing individual firm D P Monopolistic Competition demand curve for existing firm shifts with entry or exit demand for firm decreases with entry of another firm market demand is same firm’s share of market demand is smaller 19 Firm Q Demand curves facing individual firm D facing individual firm D 2 Other firms enter industry demand curve for existing firm shifts with entry or exit demand for firm decreases with entry of another firm market demand is same firm’s share of market demand is smaller P Monopolistic Competition 19 increases exit larger Firm Q Demand curves facing individual firm D D 1 Other firms leave industry Profits P MC Monopolistic Competition short-run profit maximization increase output if MR > MC decrease output if MC > MR profit maximized where MR = MC 19 price determined by demand Firm Q D FIRM ATC MR Q P
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