ECON 221 Lecture 18Outline of Last Lecture I. Monopoliesa. General infob. Natural Monopoly II. Marginal RevenueIII. Profit MaximizationIV. Price DiscriminationOutline of Current Lecture I. Monopolistic CompetitionII. Short Run effectsIII. Long Run effectsIV. Efficiency and Implications Current LectureMonopolistic Competition - Lecture 19- Combines features of both monopolies and perfect competition o More competition than either PC or monopoly is monopolistic competition o Relatively large number of producerso Free entry and exit in the long runo Differentiated productsEx. Coffee Shops in Columbia- Many coffee shops (within a particular city)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- No government or natural barriers to entry- Each shop offers a slightly different (“differentiated”) product (in terms of coffee, environment, etc.)o As a result, coffee shops have some room to raise prices without losing all their customersOther examples – “gourmet” burger restaurants vs. fast food burgers, any type of firm that aims to serve a local market (differentiation by location) - Convenience Monopolistic Competition - Features both monopoly and PCo A Mono Comp. firm can be thought of as having a monopoly over their particular version ofthe goodo Unlike monopoly, there are close substitutes and free entry, so Mono Comp. firms face competition in the long run like PC firms - Short run, identical to monopolies o Max profits at MR = MCo Downward sloping MRo Positive profit possible as long as Demand curve crosses ATC at some point  Gap between ATC and D = profit - Long runo If Mono Comp. firms in an industry are generally profitable more will want to enter – If all coffee shops in Columbia are doing well, others may find it worthwhile to enter with their own style. What Impact does this have?- If existing firms are profitable in the short run, new firms will enter reducing demand from existing firms- Continues until profits are 0- If existing firms are unprofitable, firms exit – increasing demand - Continues until profits are 0 o Implications and efficiency  Both Mono Comp and PC: firms earn 0 profit in the long-run due to competition But in PC, firms are all producing at lowest cost (minimum of ATC), whereas in MC firms are producing at higher costs – referred to as excess capacity- Due to excess capacity, Mono Comp is, in one sense, less efficient than PC Any ways more efficient?- Efficiency requires that we consider how well off everyone is- MC offers a major benefit to consumers that’s difficult to quantify o Preference for varietyPerf. Comp. Monopoly Mono. Comp.# of sellers? Many One Large NumberIdentical Products? Yes No close substitutes(irrelevant)No – slight differentiationLong run outcome forfirms ?Zero profits – firms entershifting market supplyup, reducing pricePositive profit Zero profit – firms entershifting firm demanddown, reducing price atQ*Long run outcome forsociety?Efficient Inefficient –