Principles of Economics- Mankiw (5th) 372

Principles of Economics- Mankiw (5th) 372 - 382 PA R T F I...

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382 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY and average-total-cost curves. Panel (a) of Figure 17-3 shows that the quantity of output at this point is smaller than the quantity that minimizes average total cost. Thus, under monopolistic competition, firms produce on the downward-sloping portion of their average-total-cost curves. In this way, monopolistic competition contrasts starkly with perfect competition. As panel (b) of Figure 17-3 shows, free entry in competitive markets drives firms to produce at the minimum of average total cost. The quantity that minimizes average total cost is called the efficient scale of the firm. In the long run, perfectly competitive firms produce at the efficient scale, whereas monopolistically competitive firms produce below this level. Firms are said to have excess capacity under monopolistic competition. In other words, a mo- nopolistically competitive firm, unlike a perfectly competitive firm, could increase the quantity it produces and lower the average total cost of production.
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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