chapter_12

Chapter_12 - Monopolistic Competition Characteristics 1 Many firms 2 Free entry and exit 3 Differentiated product(but high degree of

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Chapter 12 Slide 1 Monopolistic Competition Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product (but high degree of substitutability) The amount of monopoly power depends on the degree of differentiation. Examples of this common market structure include: Toothpaste; Soap; Cold remedies; Soft Drinks; Coffee
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A Monopolistically Competitive Firm in the Short and Long Run Quantity $/Q Quantity $/Q MC AC MC AC D SR MR SR D LR MR LR Q SR P SR Q LR P LR Short Run Long Run
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Chapter 12 Slide 3 Observations (short-run) Downward sloping demand - differentiated product Demand is relatively elastic - good substitutes MR < P Profits are maximized when MR = MC This firm is making economic profits Monopolistic Competition in the SR
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Chapter 12 Slide 4 Observations (long-run) Profits will attract new firms to the industry (no barriers to entry) The old firm’s demand will decrease to D LR Firm’s output and price will fall Industry output will rise No economic profit ( P = AC ) P > MC -- some monopoly power Monopolistic Competition in the LR
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Deadweight loss MC AC Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium $/Q Quantity $/Q D = MR Q C P C MC AC D LR MR LR Q MC P Quantity Perfect Competition Monopolistic Competition
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Slide 6 Monopolistic Competition Reduction in Economic Efficiency The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D , total surplus would increase by the yellow triangle. Although there are no economic profits in
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This note was uploaded on 05/09/2011 for the course ECON 111 taught by Professor Chan during the Spring '11 term at HKU.

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Chapter_12 - Monopolistic Competition Characteristics 1 Many firms 2 Free entry and exit 3 Differentiated product(but high degree of

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