Principles of Economics- Mankiw (5th) 369

Principles of Economics- Mankiw (5th) 369 - quantity and...

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CHAPTER 17 MONOPOLISTIC COMPETITION 379 downward-sloping demand curve. (By contrast, a perfectly competitive firm faces a horizontal demand curve at the market price.) Thus, the monopolistically com- petitive firm follows a monopolist’s rule for profit maximization: It chooses the quantity at which marginal revenue equals marginal cost and then uses its de- mand curve to find the price consistent with that quantity. Figure 17-1 shows the cost, demand, and marginal-revenue curves for two typical firms, each in a different monopolistically competitive industry. In both panels of this figure, the profit-maximizing quantity is found at the intersection of the marginal-revenue and marginal-cost curves. The two panels in this figure show different outcomes for the firm’s profit. In panel (a), price exceeds average total cost, so the firm makes a profit. In panel (b), price is below average total cost. In this case, the firm is unable to make a positive profit, so the best the firm can do is to minimize its losses. All this should seem familiar. A monopolistically competitive firm chooses its
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Unformatted text preview: quantity and price just as a monopoly does. In the short run, these two types of market structure are similar. THE LONG-RUN EQUILIBRIUM The situations depicted in Figure 17-1 do not last long. When firms are mak-ing profits, as in panel (a), new firms have an incentive to enter the market. This Quantity Profit-maximizing quantity Loss-minimizing quantity Price Price Demand Demand MR ATC (a) Firm Makes Profit Quantity Price Price Average total cost Average total cost (b) Firm Makes Losses Profit Losses MC Figure 17-1 M ONOPOLISTIC C OMPETITORS IN THE S HORT R UN . Monopolistic competitors, like monopolists, maximize profit by producing the quantity at which marginal revenue equals marginal cost. The firm in panel (a) makes a profit because, at this quantity, price is above average total cost. The firm in panel (b) makes losses because, at this quantity, price is less than average total cost....
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