Economics - Monopolistic Competition, Study notes of Economics

Download Economics - Monopolistic Competition and more Study notes Economics in PDF only on Docsity! Monopolistic Competition Definition  Monopolistic competition refers to a situation where there are many sellers of a differentiated products.  Many firms are making close substitutes but not perfect substitutes.  Products are differentiated each seller can sell independently decide his own price and output policies. Caffé lattes. Total Marginal “Total Marginal Average Soldper Price Revenue Aevenue Cost Cost Total Cost Week (Q) — (P) (TR) (MR) Te) (mc) (ATC) Profit 0 $6.00 $0.00 = $5.00 = = $5.00. 1 6.50 5.50 $5.50 8.00 $3.00 $8.00 2.50 2 $00 10.00 450 3.50 1.50 475 0.50 3 450 13.50 350 10.00 0.50 3.33 3.50 4 4.00 16.00 250 11.00 1.00 2.75 5.00 5 350 17.50 1.50 12.50 1.50 2.50 5,00 6 300 18.00 050 614.50 2.00 2.42 3.50 7 250 17.50 050 17.00 2.50 2.43 0.50 8 2.00 16.00 1.50 20.00 3.00 2.50 —4.00 9 150 1950 -250 2350 350 2.61 -10.00 10 1.00 10.00 3.50 27.50 4.00 275 -17.50 Price Price (dollars (dollars per cup) per cup) $6.00 $6.00 MC MC Profit. 3.50 5 3.50 5 ATC maximizing price 2.50 150 A Demand A Demand 0 123 4 5 6 8 9 10 Quantity 9 123 4 5 6 6 9 10 Quantity Profit maximizing (carte lattes Profit: maximizing (carte lattes . week) . K) quantity of lattés MR Per ) quantity of lattés MR Per week) (a) Profit-maximizing quantity and price for a monopolistic competitor (b) Short run profits for a monopolistic competitor Profits in Long Run  Short-run profits give entrepreneurs an incentive to enter a market and establish new firms.  The demand curve of an established firm shifts to the left and becomes more elastic as new firms enter the market. Entry will continue until the firm’s demand curve is tangent to its ATC curve.  In the long run:  P = ATC and the firm breaks even (zero economic profit).  The firm’s demand curve is more elastic.  Short-run losses mean firms will exit their market. As a result:  The demand curve for a firm remaining in the market shifts to the right and becomes less elastic.  Exit continues until the representative firm can charge a price equal to ATC. Excess Capacity  The equilibrium of the firms occurs at an output less than the one at which average total cost is minimum.  The excess capacity theorem states that the equilibrium for the monopolist in the long run would occur at a point where ATC is tangent to AC curve on the left.