W6 - Monopolistic Competition

how do models of monopolistic competiton differ from classical models

classical models argue trade occurs between different countries

this model predicts intra-industry trade

internal EOS

large firms have advantage over small firms

firns maximise proft where

MR = MC

formula for marginal costs

MC = change in TC / change in Q

AC FORMULA

C/Q

formula for price in monopolistic competition

P = c + 1/(b x n)   

does MC increase or decrease with price or Q

it is constant

quantity produced depends on (5)

sales

number of firms

demand curve

firm price

competitor pricr

using demand curve how do firms choose P and Q combination?

Choose Q where MR > MC

Choose Price where this Q meets the demand curve  

Difference between AC and price = profit

How does trade affect market size (S) and firm costs?

Trade increases S, allowing firms to produce more, lowering AC due to external EOS

What is the “zero-profit condition” (CC curve)?

Long-run equilibrium where Price = Average Cost, so no incentive to enter or exit the market

what happens to prices when number of firms in industry increases

gap between average costs and prices shrinks

show equilibrium and zero profit condition in monopolistic markets on graph

mechanism between trade and monopolistic markets

increases market size so Prices go down due to price convergence, while no. of firms increases - customers benefit

why is trade between industries

a large share of world trade is between similar but differentiated products - economists assume consumers favour variety - depends on degree of substitution

can benefit from internal EOS