Econ103part08 - Part 8 Monopolistic Competition and...

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Part 8 Monopolistic Competition and Oligopoly Most markets are not pure monopolies or perfectly competitive, but lie in-between Monopolistic competition is a model of a market that is competitive— many sellers, free entry—but with differentiated products Oligopoly has few sellers and involves strategic interaction between them which is difficult to predict
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Monopolistic Competition Large number of firms Each firm produces a differentiated product Each firm’s product is a close but not perfect substitute for other firm’s products Firms compete on product quality, price and marketing (advertising and packaging) Firms are free to enter and exit
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Monopolistic Competition Large number of firms means each firm is small relative to the whole market One firm’s actions have negligible effect on others No collusion is possible Each firm’s demand curve for its own brand will be downward sloping but highly elastic In the long run entry and exit will occur unless profits are just normal
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Short Run Equilibrium P Q MC ATC D MR P* Q* Economic profit Same as monopoly equilibrium except that The demand curve will be more elastic
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Long Run Equilibrium MC ATC D MR Q P P* Q* Long run equilibrium. New entry occurs which shifts each firm’s demand curve in until no economic profit remains
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This note was uploaded on 01/28/2011 for the course ECON 103 taught by Professor Rutherford during the Winter '10 term at University of Victoria.

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Econ103part08 - Part 8 Monopolistic Competition and...

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