ch12 - Chapter 12 Between Competition and Monopoly...

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Chapter 12 Between Competition and Monopoly . . . neither fish nor fowl. JOHN  HEYWOOD
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Monopolistic Competition Monopolistic competition Many buyers and sellers Freedom of exit and entry Perfect information Heterogeneous products Product differentiation Imperfect substitutes 2
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Monopolistic Competition Monopolistic competition Different from perfect competition Product differentiation Demand curve – negative slope Flatter than monopoly Price increase Lose some customers 3
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Monopolistic Competition Short-run equilibrium Marginal revenue curve Below demand curve Maximize profit Output: MR = MC Price: demand curve 4
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Short-run equilibrium of the firm under monopolistic competition Figure 1 5 MR Gallons of Gasoline per Week 0 $2.80 D 12,000 AC MC C E $3.00 Price per Gallon $3.40 $2.50 P
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Monopolistic Competition Long-run equilibrium Short-run economic profit New firms enter industry Each firm’s Demand curve – decrease MR curve – decrease Zero economic profit: P = AC Demand curve - tangent to AC curve 6
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Long-run equilibrium of the firm under monopolistic competition Figure 2 7 MR Gallons of Gasoline per Week 0 $2.70 D 10,000 AC MC E $2.85 Price per Gallon P 15,000 M
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Monopolistic Competition Excess capacity theorem Long run Output – lower Not minimize per unit costs Excess capacity Unused / wasted capacity Increase output Decrease per unit costs 8
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Oligopoly Oligopolistic behavior models 1. Ignoring interdependence Firms – ignore interdependence 2. Strategic interaction Operate in same market Interdependence 9
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ch12 - Chapter 12 Between Competition and Monopoly...

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