26 Move from monopoly to monopolistic competition Recall the characteristics of monopolistic competition: many firms, producing similar yet differentiated products, relatively free entry
27 What does the graphic model look like for Monopolistic Competition compared to Monopoly? It looks very similar because both face a downward sloping demand curve—possibly more elastic in monopolistic competition due to more close substitutes.
36 Now move from monopolistic competition to perfect competition Recall the characteristics of perfect competition: many firms, each a tiny share of the market, producing identical products, free entry and perfect information
52 The Long Run adjustments in Perfect Competition The Market Individual firm 52 P S D P P=MR MC ATC D1 S1 P P1 QQ1
53 Explanation of long run adjustments Start at price P, typical firm making zero profits Suppose demand increases to D 1 Price rises to P1 Typical firm making positive profits What happens in the long run? Assuming perfect information and free entry, new firms enter the market Supply shifts right until profits eliminated Price comes down—but how far depends on whether costs are affected
54 Long Run, continued Constant cost industry: no change in costs as new firms enter the market, price returns to P, original price Increasing cost industry: all firms experience rising costs as new firms enter the market, final price will be higher than original price P Decreasing cost industry: all firms experience lower costs as new firms enter the market, final price will be lower than original price
55 ATC MC Zero Profits in Perfect Competition 55 P Q1 P = MR P = ATC
56 Whats so “perfect” about Perfect Competition? Note that Q1 output is the output which minimizes ATC, sometimes called the technically efficient output level Also, at Q1, P = MC, price equals marginal cost, sometimes called the allocative or social efficiency condition
57 According to Joseph Schumpeter why are monopolies more innovative than perfect competition? Because of its deeper financial pockets, can afford more for research and development
58 Are big firms necessarily more innovative? Not necessarily: some small firms are very innovative- this is still a controversial area in economics.
59 Why are profits maximized where MR = MC?Why are profits maximized where MR = MC? Why is MR < P for all but the first unit of output for a Monopoly?Why is MR < P for all but the first unit of output for a Monopoly? What does the Demand Curve look for a Monopoly?What does the Demand Curve look for a Monopoly? When will a firm continue to operate even when making a loss?When will a firm continue to operate even when making a loss?
60 What is Normal Profit? What is Economic Profit? Why do firms tend to make a Normal Profit when others enter the market?Why do firms tend to make a Normal Profit when others enter the market? Why does a Perfectly Competitive firm face a horizontal demand curve?Why does a Perfectly Competitive firm face a horizontal demand curve? Why is a firm’s MC curve above its AVC curve its Supply Curve?Why is a firm’s MC curve above its AVC curve its Supply Curve?