ECON 1201 1st EditionLecture 13Outline of Previous Lecture – Natural monopolyI. Profit MaximizationII. Allocative efficiency regulationIII. Break Even RegulationOutline of Current Lecture – Monopolistic Competition and OligopolyI. Assumptions and Implications of Monopolistic CompetitionII. Assumptions and Implications of an OligopolyIII. Interdependent Behavior in OligopoliesCurrent LectureAssumptions:1. Similar products2. No barriers to entry for similar products3. Many firms4. Many buyers Implications:- Price makers- No long run profitsEXAMPLE:Cereal – Lucky Charms 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.- If demand is greater than ATC, then there is a loss- do not maintain profit in the long run because other substitutes are made- more substitutes = more elastic demand (bc more sensitive to prices)- causes the demand and marginal revenue curves to become closer togetherII. Assumptions and Implications of an OligopolyAssumptions:1. Few Firms (unlike monopolistic competition which has many firms)2. Same or similar product3. May be many buyers4. Barriers to entry *** Implications:- Interdependent behavior (want to know what each other is doing and what moves they are going to make next – like a game of chess)- Interdependent behavior can be cooperative or non – cooperative Cooperative ~ Cartel : an agreement that firms will work together and not put each other out of business because of unanticipated price increases or other changesex. OPEC, drug cartels - Cartels are illegal in the United States- there is an incentive for cartel members to cheat and produce more in order to make more profit … if no one finds out then they end up doing better than the other firms- VIOLENCE in drug cartel takes away that incentive to cheat, although people still do it because there is a great profit involved- Professor talked about mafia
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