lecture_10 - Monopolistic competition and oligopoly...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 1001 LECTURE 11 1 Monopolistic competition and oligopoly Monopolistic competition – a market structure in which many Firms sell products that are similar but not identical MC has the following features: 1. Many sellers 2. Product differentiation - each firm faces downward sloping D (not a price taker) 3. Free entry (and exit) - eco π = 0 in the long run
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ECON 1001 LECTURE 11 2 Monopolistic competition in the short run A firm in a monopolistically competitive industry faces a downward sloping demand - profit maximising rule MR = MC - price from the demand curve, price consistent with the q set The firm can earn short-run economic profit. The firm produces less than capacity — less than the output than minimises its minimum average total cost.
Background image of page 2
ECON 1001 LECTURE 11 3 MC ATC D MR q P A monopolistically competitive firm in the SR Facing a downward sloping D curve, a firm sets q where MC = MR. π = (P – ATC)*q q mc π P mc
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ECON 1001 LECTURE 11 4 MC ATC D MR q P A monopolistically competitive firm in the SR Facing a downward sloping D curve, a firm sets q where MC = MR. Here, π = (P – ATC)*q < 0 the firm is making a loss q mc π < 0 P mc
Background image of page 4
ECON 1001 LECTURE 11 5 In the long run, profits provide an incentive for new firms to enter the market - this reduces demand for all incumbent firms (enter shifts demand curve to the left). - this continues until zero economic profits In the LR, if firms are making losses, firms will leave the industry - this increases demand for all incumbents (demand shifts to the right for firms left in the industry) - this continues until no more economic losses
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ECON 1001 LECTURE 11 6 MC ATC D MR q P A monopolistically competitive firm in the LR In the LR, enter and exit means that all firms will make zero profits, so π = (P – ATC)*q = 0. q mc P mc
Background image of page 6
ECON 1001 LECTURE 11 7 Demand just touches the average total cost curve – they are tangents These two curves must be tangents once entry+exit has driven profit to zero. Profit per unit is the difference between price (or AR found on the demand curve) and ATC The maximum profit is zero only if these two curves touch each other without crossing.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ECON 1001 LECTURE 11 8 In the LR in monopolistic competition - P > MC. Profit maximisation occurs when MR = MC, and as each firm faces a downward sloping demand curve, MR is less than price. (this is like a monopoly) - P = ATC. Because of free entry and exit economic profits are driven to zero (like in a competitive industry)
Background image of page 8
ECON 1001 LECTURE 11 9 Comparison between mono competition and perfect competition Higher average costs In a monopolistic competitive market, a firm will be at the tangency point between price and ATC - this point must be to the left of the minimum of ATC (the efficient scale) A monopolistic competitive firm produce at downward-sloping portion of their ATC - Monopolistic competition does not minimise ATC (unlike perfect competition)
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ECON 1001 LECTURE 11 10 Mark-up over marginal cost For a monopolistic competitive firm, P > MC
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 48

lecture_10 - Monopolistic competition and oligopoly...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online