Monopolistic Competition Long Run Equilibrium Chapter 17 Pages

Monopolistic Competition Long Run Equilibrium Chapter 17 Pages 373 -386

Efficiency Review • Allocative Efficiency when P = MC – 3 market structures fail as P > MC (monopoly, oligopoly, monopolistic competition) – Only Competitive firms are Allocatively Efficient • Production Efficiency when P = min. of ATC – 3 market structures fail as P > min of ATC (efficient scale production) – Competitive Firms achieve it only in long run 3 Market Structures Competitive Markets P = MC (always) P = min of ATC (long run) (Efficient Scale Production) P > MC P > min of ATC

Review: Monopolistic Competition New firms entering leads to: 1) Demand Curve shifts left – As your firm sells less! 2) Profit Declines 3) Entry stops when profit = zero LONG RUN: Monopolistic Competition -------- E 1 Profit --------------- P 1 SHORT RUN: Q 1

Long Run Equilibrium Monopolistic vs. Perfect Competition Monopolistically Competitive Firm Price MC MC ATC P P MR 0 Perfectly Competitive Firm Q Efficient Scale ATC D = MR Demand Quantity 0 Q = Efficient scale Qty - Gap between efficient scale production & qty produced

Perfect vs. Monopolistic Competition • • PERFECT COMPETITION: Profit in short run, zero L. R. Many Firms No excess capacity in long run Production at minimum of ATC – Production efficiency • Price = MC (allocatively efficient) • No deadweight Loss • No incentive to advertise • • MONOPOLISTIC COMPETITION: Profit in short run, zero L. R. Many Firms Excess capacity in long run Production above minimum of ATC – No production efficiency • Price > MC • Some deadweight Loss • Incentive to advertise

Practice Test

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