Micro12 - Chapter 12 Monopolistic Competition& Oligopoly...

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Unformatted text preview: Chapter 12 Monopolistic Competition & Oligopoly Monopolistic Competition: Many small size firms selling differentiated products that are good substitute for each other. Characteristics of Monopolistic Competition: • Firms compete by selling differentiated products. • Free entry and exit. • Limited monopoly power that makes demand downward sloping. Short-Run Equilibrium: By setting MR = MC, firms decide price and quantity simultaneously to maximize profit. In the short-run, firms earn profit. Chapter 12 Monopolistic Competition & Oligopoly Demand Facing a Firm in Perfectly Competitive, Monopoly, and Monopolistic Competition. Perfect Comp. Monopoly Monopolistic Comp. Chapter 12 Monopolistic Competition & Oligopoly Profit-Maximizing Monopoly Chapter 12 Monopolistic Competition & Oligopoly Monopolistc Competition, Short-Run Equilibrium Chapter 12 Monopolistic Competition & Oligopoly Perfect Competition, Short-Run Equilibrium Chapter 12 Monopolistic Competition & Oligopoly Perfect Competition, Long-Run Equilibrium Price falls to Min. ATC and firm earns only normal profit Chapter 12 Monopolistic Competition & Oligopoly Monopolistic Competition, Long-Run Equilibrium The Firm Earns normal profit. Efficiency is less than perfect competition because the firm is not operating at Min. ATC point. Chapter 12 Monopolistic Competition & Oligopoly In the Long-run, entry to the market drives the profit down to P = ATC, and the firm earns normal profit . To increase their sale and profit over time, firms in monopolistic competition resort to advertising. Advertising shifts demand to right. Note that , demand and price do not fall to minimum average total cost (Min. ATC). Price is higher than Min. ATC. Chapter 12 Monopolistic Competition & Oligopoly Efficiency of Monopolistic Competition Firm: Perfectly competitive market is efficient because it maximizes consumer and producer surplus by the rule: MR = P = MU = MC. In Monopolistic Competition: MC = MR < P . The value to the consumers of the additional units of good is more than MC. If MC = P, total surplus could be increased (the firms would supply more goods to market). • The monopoly power of the monopolistic competition firm creates dead weight loss . • Monopolistic competition firm operates with excess capacity . Its output is below Min. ATC. Chapter 12 Monopolistic Competition & Oligopoly • Entry of new firms drives the profit to zero both in perfect competition and monopolistic competition. However, for perfect competition, in the long-run, P = Min. ATC . In monopolistic competition P > Min. ATC . That is monopolistics competitive firms operate with...
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This note was uploaded on 01/17/2011 for the course ECON 100B taught by Professor Bacolod during the Winter '05 term at UC Irvine.

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Micro12 - Chapter 12 Monopolistic Competition& Oligopoly...

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