09.29.08 - ECONOMICS 1 Professor Kenneth Train 9/29/08...

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ECONOMICS 1 Professor Kenneth Train 9/29/08 Lecture 9 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE There are two parts to today’s lecture: first, monopolistic competition, and then oligopoly. MONOPOLISTIC COMPETITION What is monopolistic competition in a competitive market? There are four elements: - Many firms - Heterogeneous product (differentiated) - Free entry and exit - Equal access to technology and inputs This is a very widespread type of industry. What are some examples? Student : Restaurants. That’s a good example. Automobiles are too; if Camry raises its price I can easily go to Toyota and buy from them. Student : Does the automobile industry count as monopolistic competition or an oligopoly? In the old days it would be an oligopoly since there were only three firms. Today not so much because there are a lot more brands. Soap is another good example of an industry with a differentiated product and monopolistic competition. Looking at Monopolistic Competition The forces operating in this market also operate in a competitive market, so let’s look at monopolistic competition in the same way as competitive industries. First, we’ll look at stage one and see what firms will do in that setting, then we’ll look at stage two. STAGE ONE: Fixed Number of Firms Demand Curve The main difference in this type of competition is its heterogeneous products. Differentiated products mean that each firm faces a downward sloping demand curve. For any given price the firm could raise its price and there would still be people buying it. From an individual firm perspective, it’s the same as if it were a monopoly. It earns more profits if it sells extra units, but it must lower price to do so. Each firm’s price will respond to its MR rather than the going price. If you compare this to the MC curve, you get a graph the same as a monopoly. The only difference from a firm’s perspective is generally the demand curve is less steep than it would be for a monopoly demand curve:
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 9/29/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 Supply-Side: Output Level A firm chooses output where MR = MC. This means that price is greater than MC. Firms earn a profit: We have less than the optimal number of output and firms. This is a little strange to think about. What does it mean to not have the optimal number of restaurants? The joy people get from eating there is less than the socially optimal level. Having more
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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09.29.08 - ECONOMICS 1 Professor Kenneth Train 9/29/08...

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