ECON 202 1nd Edition Lecture 28 Outline of Last Lecture I. Price Discriminationa. Conditions for Price Discriminationb. Profit Maximization - With Price Discrimination c. Perfect Price DiscriminationOutline of Current Lecture I. Monopolistic Competitiona. Characteristics of Monopolistic Competitionb. Profit Maximization – In Monopolistic Competitioni. Short Runii. Long RunCurrent LectureMonopolistic CompetitionCharacteristics of Monopolistic Competition1. Large number of firms in the industry, but each is small relative to the size of the industry2. No barriers to entry or exit (guarantees firms will make 0 economic profit in the long run)3. Product Differentiation – a strategy used by firms to achieve market powera. This is achieved by producing goods that have distinct identities in the minds of consumersb. This is most commonly achieved through advertising4. Demand Curve faced by a monopolistically competitive firm is DOWNWARD slopinga. Because of product differentiation, monopolistically competitive firms have some market power, therefore their demand curve is downward slopingb. A Monopolistically Competitive firm’s demand curve is typically more elastic than amonopoly’s demand curveThese 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. DMRPQDemand Curve faced by a monopolistically competitive firmProfit Maximization – In Monopolistic CompetitionThe Short Run1. π > 0 (P > ATC)P < ATC Profits > 0Therefore the firm is making a profit in the short run2. π = 0 (P = ATC)P = ATC Profits = 0Therefore the firm is making 0 economic profit in the short run3. π < 0 (P < ATC)P < ATC Profits < 0Therefore the firm is making a loss in the short run- In the short run, a monopolistically competitive firm can make profits,break even, or make a loss depending on whether Price is GREATER THAN, EQUAL TO, or LESS THAN ATCDMR$QATCMCQ*P*ATCPROFITSDMR$QATCMCQ*P*ATCDMR$QATCMCQ*P*ATCLOSSThe Long Run- If firms are making short run profits, new firms enter and produce similar goods- As new firms enter, demand curves of existing firms SHIFT LEFT, taking MR curve with it- Entry continues until profits are eliminated (P = ATC)- This happens where the demand curve is TANGENT to the ATC curveLong Run Equilibrium Graph – “Tangency Solution”P = ATCπ = 0Compared to Perfect CompetitionIs Price = to Marginal Cost?NO. Price > MC so there is no AllocativeefficiencyIs Price = to minimum Average Total CostNO. Price > minimum average total cost (but Price = ATC) so there is no Productive
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