Okay we saw in the previous video the monopoly part of monopolistic competition

Okay we saw in the previous video the monopoly part

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>> Okay we saw in the previous video the monopoly part of monopolistic competition that the firm facesa downward sloping demand curve. They're the only ones who sell exactly their type of product, their brand; their type of pizza or their particular cuisine in the restaurant. And so they can afford to raise theirprice a little bit above their competitors and not lose all of their customers. So we saw the short run profit maximization situation. Now, in the long run, we look at the competition part of the monopolistic competition, and that is driven by the assumption of easy entry and exit. Okay, so if firms are making--this is just like perfect competition. If firms are making a positive profit, okay, so if the price is greater than the average total cost, this means that firms are making a positive profit, a positive economic profit.Remember what we mean by that, that you include the opportunity cost as well? All right, so you're doing better than you could in your next-best alternative. Okay, and then this means that other firms willenter. Okay and what happens in this type of market is that this means that some of the customers are going to get stolen away by the new firms. Okay so the demand facing the existing firms...
[ Background Sounds ]...goes down. Okay, so in other courses you'll hear the term residual demand. Okay, so I'll just right here for you so in case you run into this you'll know what it means. Residual demand just refers to the total market demand minus the supply of all the other firms. Okay, so think of the total market demand for restaurant meals, and then if you're a particular restaurant take all the meals that are served by your competitors and subtract that from the total demand, and what's left is what you face, the demand curve that the firm faces; that's called the residual demand. So when there's entry, a new restaurant opens up, it steals away some of the customers from the existing firms, and then this whole process plays out in reverse if the firms are making a loss, because what happens in that case--I'll just write it outfor you real quickly. If we have this case where the price is less than the average total cost, okay so the firm is making an economic loss...[ Background Sounds ]...all right then this is going to mean existing firms will exit the market. Some of them, not all of them, okay so some firms will exit the market, and then that's going to mean that demand facing the remainingfirms' increases.[ Background Sounds ]Okay, so what the upshot of this is is that if you're making a profit, other firms are going to come in and steal some of your customers. If you're making a loss, some firms are going to exit the market and so that's going to increase your demand. And so in the long run equilibrium here's what we find. Okay, so we'll go back to a situation where, and again, this is driven by the entry and the exit; it's easy to start a restaurant or whatever particular industry we're talking about. Okay, so we're going to look at what we

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