econ chapter 10 Monopolistic competition

Monopolistic competition Chapter 10 monopolistic competition

market structure with many firms selling products that are substitutes but different enough that each firm’s demand curve slopes downward, firm entry is relatively easy

Where is profit maximized? Chapter 10 monopolistic competition

where MR equals MC

When does the firm equal economic profit? Chapter 10 monopolistic competition

price exceeds ATC

If price is lower than ATC and greater than AVC Chapter 10 monopolistic competition

firm incur economic loss but continue to produce in the short run

When does a firm shut down? Chapter 10 monopolistic competition

if price is less than AVC

Monopolistic competitive firm in the short run (maximizing short-run profit) Chapter 10 monopolistic competition

price is indicated by point b on downward sloping demand curve, earns short run economic profit in blue rectangle

Minimizing short-run loss Monopolistic competitor in the short run Chapter 10

average total cost exceeds the price at the output where marginal revenue equals marginal cost, the firm suffers a short-run loss equal to c-p multiplied by q, shown by pink rectangle

because market entry is easy, monopolistically competitive firms earn (Chapter 10 Monopolistic Competition)

zero economic profit in the long run

Long-run equilibrium in monopolistic competition (Chapter 10 Monopolistic Competition)

economic profit is zero at output q which means no more firms will enter

Comparing perfect competition versus monopolistic competition in long-run equilibrium (chapter 10 monopolistic competition)

on the left the perfectly competitive firm of panel faces a demand curve that is horizontal at market price, monopolistically competitive firm produces less output and charges at a higher price

do either firms earn economic profit? Chapter 10 Monop. comp.

no

Oligopoly

industry dominated by just a few firms

What industries are oligopolistic?

steel, automobiles, oil, breakfast cereals, etc

Undifferentiated oligopoly

sells a commodity or a product that does not differ across suppliers, such as an ingot of steel

differentiated oligopoly

sells products that differ across suppliers such as automobiles or breakfast cereal

What is this graph? chap 10

economies of scale as a barrier to entry, firm can produce more at an average cost of cb. if prices are below ca a new entrant would suffer a loss

Collusion

agreement among firms in the industry to divide the market and fix the price

Cartel

group of firms that agree to collude so they can act as a monopoly to increase economic profit

Game theory

examines oligopolistic behavior as a series of strategic moves and countermoves among rival firms

Prisoner’s dilemma

game that shows why players have difficulty cooperating even though they would benefit from cooperation

price leader

sets the price for the industry, initiates price changes