At each q mr p to maximize profit firm produces q

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At each Q , MR < P . To maximize profit, firm produces Q where MR = MC . The firm uses the D curve to set P . 6 Quantity Price ATC D MR MC Q
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GESB 1006: Economics of Everyday Life University of Macau A Monopolistic Competitive Firm Earning 7 losses With Losses in the Short Run Quantity Price ATC Q P ATC MC D MR For this firm, P < ATC at the output where MR = MC . The best this firm can do is to minimize its losses.
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GESB 1006: Economics of Everyday Life University of Macau Long-Run Equilibrium If monopolistically competitive firms are making profit in short run New firms: incentive to enter the market Increase number of products Reduces demand faced by each firm Demand curve shifts left; prices fall Each firm’s profit declines to zero If losses in the short run: Some firms exit the market, remaining firms enjoy higher demand and prices
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GESB 1006: Economics of Everyday Life University of Macau A Monopolistic Competitor in the Long-Run Entry and exit occurs until P = ATC and profit = zero. Notice that the firm charges a markup of price over marginal cost and does not produce at minimum ATC . Quantity Price ATC D MR Q MC P = ATC markup
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GESB 1006: Economics of Everyday Life University of Macau Why Monopolistic Competition is Less Efficient Monopolistic competition Excess capacity: quantity is not at minimum ATC (it is on the downward- sloping portion of ATC) Markup over marginal cost: P > MC Perfect competition Quantity: at minimum ATC (efficient scale) P = MC
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GESB 1006: Economics of Everyday Life University of Macau Welfare of Society Monopolistically competitive markets Do not have all the desirable welfare properties of perfectly competitive markets Sources of inefficiency Markup of price over marginal cost Too much or too little entry (number of firms in the market) Product-variety externality Business-stealing externality
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