17 Economies of Scale, Part 2

17 Economies of Scale, Part 2 - Economies of Scale, Part 2...

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1 1 Economies of Scale, Part 2 • Monopolistic Competition – Monopolistic Competition Model – Market Equilibrium – Limitations of the Model – Monopolistic Competition and Trade – Gains from an Integrated Market – Scale Economies and Comparative Advantage – Intra- and Inter-Industry Trade 2 Monopolistic Competition In monopolistic competition models, two key assumptions are made to avoid the problem of firm interdependence: 1. Each firm is able to differentiate its product from its rivals. 2. Each firm takes the prices charged by its rivals as given . 3 Monopolistic Competition Models Simplifying assumptions: 1. The industry consists of a small number of firms . 2. Each firm produces a differentiated product . 3. The demand curve facing a typical firm is: Q = S * [ 1/n – b * ( P – P* ) ] 4 Monopolistic Competition Models Simplifying assumptions: 3. Q = S * [ 1/n – b * ( P – P* ) ] •w h e r e Q is the firm’s sales, S is the total sales of the industry, n is the number of firms in the industry, b is a constant term representing the responsiveness of a firm’s sales to its price, P is the price charged by the firm, and
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2 5 Monopolistic Competition Models Simplifying assumptions: 4. The total sales of the industry, S, is fixed . S is unaffected by the average price P*. 5. All firms in the industry are symmetric . 6 Monopolistic Competition Models A monopolistically competitive industry can be analyzed once we have determined: 1. The number of firms , n, and 2. The average price they charge , P*. This required deriving 3 relationships. 7
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This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at Berkeley.

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17 Economies of Scale, Part 2 - Economies of Scale, Part 2...

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