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AP Economics Mr. Bernstein Module 67: Introduction to Monopolistic Competition December 2015.
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Transcript of AP Economics Mr. Bernstein Module 67: Introduction to Monopolistic Competition December 2015.
AP Economics
Mr. Bernstein
Module 67: Introduction to Monopolistic Competition
December 2015
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AP EconomicsMr. Bernstein
Characteristics of Monopolistic Competition• Like Perfect Competition:
• Many firms (too many to allow tacit collusion but fewer than Perfect Competition)
• No barriers to entry or exit
• Like Monopoly:• Some ability to set pricing – faces downward sloping D
• But Unlike Perfect Competition or Monopoly…• Products differentiated vs competition
• Examples• Local restaurants, retail groceries or clothing stores
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AP EconomicsMr. Bernstein
Monopolistic Competition in the Short Run• D is downward sloping• In Short Run, set P andQ as a Monopoly would• Can earn profit in short run
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AP EconomicsMr. Bernstein
Monopolistic Competition in the Short Run• Can also earn loss in short run
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AP EconomicsMr. Bernstein
Monopolistic Competition in the Long Run• Entry and exit can occurin response to short-runprofits or losses• Same adjustmentprocess as Perfect Comp.• Firms will earn normal profit in the long run• P*=ATC, tangent to ATC (not at minimum…)
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AP EconomicsMr. Bernstein
Monopolistic Competition vs. Perfect Competition• Normal profits in both (easy entry and exit)• MR=MC in both• In Perfect Comp, ATC=P=MR=MC, but in
Monopolistic Comp ATC=P > MR=MC…on the downward sloping range of ATC
• So Monopolistic Comp in not productively efficient (P=ATC min) and output is less than in Perfect Comp. Economists call this excess capacity
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AP EconomicsMr. Bernstein
Is Monopolistic Competition Inefficient?• Since P>MC, DWL does occur• Because there is some competition, the wedge
between P and MC is smaller than in monopoly• Differentiated products bring variety to consumers• Differentiated products also bring some pricing
power to producers (the price of variety?)