EC1301 - Monopolistic Competition - 5
5
FIGURE 2: A Monopolistically Competitive Firm in the Long Run 1 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Dollars Homes Serviced per Month ATC MC d 1 MR 1 250 d 2 MR 2 $40 1. In the long run, profit attracts entry, which shifts the firm’s demand curve leftward. 100 2. Entry continues until P=ATC at the best output level, and economic profit is zero. 3. The typical firm produces where its new MR crosses MC E
description
df
Transcript of EC1301 - Monopolistic Competition - 5
FIGURE 2: A Monopolistically Competitive Firmin the Long Run
1© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Dollars
Homes Serviced per Month
ATC
MC
d1
MR1
250
d2MR2
$40
1. In the long run, profit attracts entry, which shifts the firm’s demand curve leftward.
100
2. Entry continues until P=ATC at the best output level, and economic profit is zero.
3. The typical firm produces where its new MR crosses MC
E
Monopolistic Competition• Excess capacity under monopolistic
competition– Long-run equilibrium: firm produces on the
downward-sloping portion of its ATC curve• Never at minimum average cost
– Its long-run output level is always too small to minimize cost per unit
– The firm operates with excess capacity
2© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
FIGURE 2: A Monopolistically Competitive Firm in the Long Run
3© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Dollars
Homes Serviced per Month
ATC
MC
d1
MR1
250
d2MR2
$40
1. In the long run, profit attracts entry, which shifts the firm’s demand curve leftward.
100
2. Entry continues until P=ATC at the best output level, and economic profit is zero.
3. The typical firm produces where its new MR crosses MC
E
In long-run equilibrium, a monopolistic competitor earns zero profit and operates on the downward-sloping portion of its ATC curve (100 units, at point E). As a result, it does not use enough of its capacity to minimize its average total cost. “Capacity output” (where ATC is minimized) is 200 units. But for any rise in output beyond 100, MR < MC, so profit would decrease (the firm would go from zero to negative profit).
FIGURE 3: Excess Capacity in Monopolistic Competition
4© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Dollars
Homes Serviced per Month
ATC
MC
200
d2MR2
$40
100
E
LR equilibrium output
“Capacity output”
Monopolistic Competition
• Excess capacity and prices– In the long-run: P > minimum ATC
• Higher price under monopolistic competition than under perfect competition
– Because of product differentiation – Consumers usually benefit from product
differentiation
5© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
