SECTION VII OUTLINE

SECTION VII OUTLINE - I. SECTION VII OTHER PRICE-SEARCHERS'...

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I. SECTION VII – OTHER PRICE-SEARCHERS’ MARKETS a. Monopolistic Competition i. Monopolistic Competition occurs in which some firms may be able to create their own individual market by product differentiaion (producing close bu imperfect substitutes for competing products) ii. In monopolistic competition each firm has managed successfully to differentiate its product in the minds of buyers iii. The demand curve for this slopes downard making the analysis analogous to monopoly iv. Marginal Revenue (MR) falls below price and firms maximize profits where margincal cost equals marginal revenue (MC=MR) instead of where marginal cost equals price v. No special barriers to new competition exist here and entry is open 1. As a result, profit seeking firms selling similar but not identical products are attracted into the industry in the long run 2. As entry occurs, the long run demand curve becomes more elastic 3. The presence of closer substituytes reinforces the rising demand elasticity vi. The fundamental novelty of the monopolistic competition model is that long run equilibrium occurs on a downward sloping section of the firm’s average total cost curve 1. They do not produce where average total cost is minimized vii. Excess profits are eliminated in monopolistic competition, but welfare losses are not
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This note was uploaded on 04/10/2008 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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SECTION VII OUTLINE - I. SECTION VII OTHER PRICE-SEARCHERS'...

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