Key Terms
Monopolistic competition
Many firms; differentiated products; low barriers. Oligopoly: few firms; high barriers; mutual interdependence.
Location
A gas station at a busy intersection vs. a back road 3.
Intangible aspects
Warranties, guarantees, free delivery, brand reputation 4. Perception: advertising shapes preferences even when products
Perfectly competitive firm
Perfectly elastic demand (horizontal line). Can sell any quantity at the market price; zero pricing power.
Monopoly
Faces the entire market demand curve (downward sloping). Full pricing power.
Monopolistic competitor
Demand curve is downward sloping but more elastic than a monopoly's. More substitutes exist; so raising price loses more
Rule is the same as monopoly
Produce where MR = MC; then look up to the demand curve to find the price.
Profit per unit
$16.00 - $14.50 = $1.50. Total profit: $1.50 x 40 = $60.
Alternatively
Total revenue ($640) - Total cost ($580) = $60.
Short run
A monopolistic competitor can earn positive or negative economic profit.
Long run
Entry and exit eliminate economic profit entirely.
If profit is positive
New firms enter; existing firm's demand curve shifts left (fewer customers at any given price); MR shifts left; profit f
If profit is negative
Firms exit; existing firm's demand curve shifts right (more customers at any given price); losses shrink.
Process continues until
Demand curve is tangent to the average cost curve. At that point P = AC and economic profit = zero.
Productive efficiency
Producing at the lowest point on the AC curve. Perfect competitors achieve this in the long run.