L> videolecturenotesa11 MONOPOLISTIC COMPETITION 10.1-2 Defining Monopolistic Competition 10.2-1 Short-Run Profit Maximization for a Monopolistically Competitive Firm - Understanding Pricing and Output in Monopolistic Competition Monopolistic Competition (econclassroom.com 20:51) efficiency begins at 15:00 Monopolistic Competition in the Long-Run: Econ Concepts in 60 Seconds through AP Economics Teacher (ACDCEcon 3:25) http://www.youtube.com/watch?v=erdzOu3juNI OLIGOPOLY 11.2-1 Introducing Oligopoly and the Prisoner"s Dilemma 10.4-1 Advertising and Brand also Names - Understanding Monopolistic Competition (Oligopoly ???) as a Prisoner"s Crisis Kinked Demand Model (econclassroom.com 14:06) Oligopolies, Duopolies, Collusion, and Cartels (Khan Academy 8:26) SUMMARY Determining the Efficiency of Firms in Different Market Structures (econclassroom.com 18:23) Monopolistic Competition(econclassroom.com 20:51)http://www.econclassroom.com/?p=3128(performance starts at 15:00)start at 15:00 Are monopolistically competitive firms efficient? Graph of a monopolistically competitive firm in long run equilibrium firms earn a normal (zero) profit bereason of few barriers to entry (P=ATC indicates zero profit) therefore there is no inspiration for other firms to enter Are they efficient? NO. Neither allocative or productive performance will be completed by monopolistically competitive firms in the lengthy run. Productive effectiveness is NOT being achieved the profit maximizing amount (Q) is not at the lowest allude on the ATC curve. The lowest point is wright here MC-ATC (Qpe on the graph below) so to maximize revenues, monopolistically competitive firms will certainly restrict output and also charge a slightly higher price than the minimum ATC Allocative effectiveness is NOT being achieved We know that allocative performance occurs wright here MB=MC (or MSB=MSC). On the graph MSB is measured by the demand (or price) curve and the MSC is measured by the MC curve. So, allocative efficiency occurs at the amount wbelow P=MC. At the profit maximizing amount we d>have the right to check out that P>MC or MSB>MSC, so the firm is NOT allocatively reliable. There will be an underallocation of sources (also little bit will certainly be produced). The quantity wbelow P=MC (Qso) is better than the profit maximizing level of output (Q). We will certainly constantly acquire abundant and allocative ineffectiveness when the demand curve is downward sloping so the MR is much less than the price (demand) Only in pure competition perform we get fertile and also allocative efficiency Monopolistic Competition inthe Long-Run: Econ Concepts in 60 Seconds via AP EconomicsTeacher (ACDCEcon 3:26)http://www.youtube.com/watch?v=erdzOu3juNI How to attract a monopolistically competitive firm"s long run equilibrium graph downward sloping demand also MR is listed below the Demand MC goes dvery own at first ant then up IMPORTANT: NOW you must find the profit maximizing price and also amount before you attract the ATC curve uncover the amount wright here MR=MC then drive as much as the demand curve and over to gain the price we have to know the price prior to we attract the ATC curve then attract the ATC curve tangent to the demand curve (just touching however not crossing) at the the profit maximizing price (sweet spot). Now uncover the socially optimal quantity (the allocatively efficient quantity) the alloc. eff. amount occurs wright here P = MC. (On the video he claims this is "wright here supply equals demand" and he mirrors that MC=S. This is the exact same as P=MC ) outcome. the profit maximizing quantity, Q, (WHAT WE GET) is much less than the allocatively efficient amount, Qso (WHATWE WANT). there is a deadweight loss Now find the productively efficient quantity this is at the minimum suggest of the ATC, or where MC=ATC notification that the profit maximizing amount is less than the amount wright here ATC is at a minimum, so monopolistically competitive firms are not productively efficient. They execute not develop at the lowest ATC The difference in between these 2 amounts is referred to as "excess capacity" interpretation the firm could develop even more at a lower price however they host ago production to increase their earnings Classic mistake once illustration the graph of monopolistic competition in long run equilibrium: the timeless mistake is illustration the ATC tangent to wright here demand also hits the MC curve Kinked Demand Model(econclassroom.com 14:06)http://www.econclassroom.com/?p=3144Preview: In this leskid we take a graphical approach to oligopoly, and also look for to define why prices tfinish not to fluctuate up or dvery own in oligopolistic sectors. Why execute some oligopolies have incredibly little bit catalyst to decrease their prices, and also additionally a strong catalyst not to raise their prices? What emerges is a kinked demand also curve, extremely elastic at prices above the existing equilibrium and very inelastic at prices listed below the existing equilibrium. Alengthy with this kinked demand also curve comes a kinked marginal revenue curve, with a vertical section. The implication is that also as an oligopolist’s costs climb and fall in the short-run, its level of output and also price often tends to reprimary secure.Rewatch - Oligopolies: few firms mutual interdependence Mutual interdependence exists as soon as firms take into consideration their rivals" reactions while adjusting prices and outputs. Assumptions about oligopolypricing habits (kinked demand also model) before changing its price an oligopolist will certainly attempt to predict what its rivals will certainly execute if they do readjust their price ASSUME: competitors will certainly match price decreases - if one firm lowers its price the rivals will certainly lower their prices This make feeling because the competitors will certainly not desire to lose most customers to a contender that lowers it price, so they will decrease their price too. therefore, the demand curve is inelastic, if all firms lower their prices they will not obtain incredibly many customers, i.e. the % adjust is quantity demanded will certainly be little = inelastic ASSUME: competitors disregard price rises - if one firm raises its price the competitors will certainly not raise their prices This renders sense bereason rivals could acquire a lot of customers if they retained their prices low when one firm raises theirs therefore, the demand curve will certainly be elastic, if one firm raises its price and the various other firms do not, the one firm will certainly shed many customers, i. e. the % readjust in quantity demanded will certainly be big = elastic So what does the demand also curvelook favor through these assumption? demand listed below the going price will certainly be inelastic (steeper); a tiny increase in amount if the price is reduced demand also over the going price will certainly be elastic (flatter); a huge decrease in quantity if the price is increased so the demand curve will certainly be "kinked", or bent. So why are firms reluctant toreadjust their prices? since demand also is inelastic below the going price, if a firms lowers its price (and its rivals do not) then its complete profits will certainly decrease; a large drop in price but a tiny boost in quantity causes TR to decline since demand also is elastic above the going price, if a firm raises its price (and also all its competitors raise their prices too) then its complete earnings will certainly decrease; a tiny boost in price however a big decrease in quantity causes TR to decline Because of this, prices in an oligopolistic industry are "sticky"; i.e. they tfinish not to change because if a firms raises, or lowers its price, its complete earnings will certainly fallSo what does the MR curve looklike? We understand that when the demand curve is downward sloping, the MR curve is below it the MR diminishes at twice the rate that demand also does therefore, we end up through 2 MR curves, one somewhat level under the elastic percentage of the kinked demand curve and an additional steep under the inelastic portion of the demand also curve, and a vertical portion of the MR curve connecting the two So what will certainly oligopolists carry out iftheir costs change? Will they readjust their prices and also quantities? perhaps not in various other sectors if variable prices rise, the MC will increase and also the profit maximizing level of output (wright here MR=MC) will decrease, and if variable costs loss, the MC will autumn and the profit maximizing level of output (where MR=MC) will increase yet in the kinked demand also version, if the MC crosses MR in the vertical section, a change in prices will certainly not change the profit maximizing level of output or the profit maximizing price. the price and quantity wright here MR = MC will remain the very same even if MC rises or drops ME: Most financial textbook and also virtual video lectures execute not incorporate the ATC curve in their kinked demand version. I am not certain why. And they frequently encompass 2 MC curves to show that changes in expenses perform not change the profit maximizing quantity or price. right here is a graph of the oligopoly kinked demand also version via the ATC curve and just one MC: Oligopolies, Duopolies,Collusion, and Cartels (Khan Academy 8:26)http://www.khanacademy.org/finance-economics/microeconomics/v/oligopolies--duopolies--collusion--and-cartelsReview oligopoly "oli" means "few" "polies" means "sellers" occasionally oligopolies act more like monopolies and occasionally they act more like competitive marketsCollusion (acting more like amonopoly) if they coordinate their pricing and production decisions they are acting more prefer a syndicate this is called collusion this is frequently illegal if they execute it formally (like created agreements) then we call it a cartel example of a cartel: OPEC (the Organization of Petroleum Exporting Countries) 12 countries manage 79% of the world"s oil reserve (2012) and also 44% of the world"s oil manufacturing (2012) attempt to act favor a monopoly one problem through collusion is that individual firms (or countries as in OPEC) have an incentive to CHEAT: i.e. they might have the ability to make even more money if the say that they are going to charge a high price like the rest of the firms, but then they reduced their price a take customers amethod from all the various other firmsOligopolies that are MoreCompetitive Example: Coca-Cola vs.Pepsi Coke and Pepsi complete on price and on marketing a duopoly is an oligopoly via only two significant firms examples of oligopolies that compete (act even more prefer pure competition): Coca-Cola and also Pepsi (duopoly) Boeing and also Airbus (big passenger jet manufacturers - duopoly) Airlines most cities have just a few airlines their commodities are very similar (standardized?) credit card (Visa, Mastercard, Find Out Amerideserve to Express) governments attempt to assure that oligopolies contend fairly than collude because collusion is ineffective (favor monopolies) and also when they complete they are more efficient (even more favor pure competition) through a bigger consumer plus producer excess (full surplus).SUMMARYDetermining the Efficiencyof Firms in Different Market Structures (econclassroom.com18:23)http://www.econclassroom.com/?p=4456Summary two kinds of performance productive efficiency producing at the level of output where its ATC is minimized is the price equal to the minimum ATC ME: amount wbelow MC=ATC allocative performance developing at the level of output wright here the MB = MC ME: MSB = MSC completed where P=MC (or D=MC) the demand curve represents the MB that consumers receive from the usage of a great additionally referred to as the socially optimal quantity Perfect Competition Long RunEquilibrium extremely many kind of firms creating standardized (identical) commodities with no obstacles to entry demand perfectly elastic (firm is a price taker) since there are exceptionally many firms producing identical assets and no individual firm has any industry power D=P=MR equilibrium price is establimelted in the market (supply and demand in the market) zero (normal) financial revenues in long run equilibrium because of no obstacles to enattempt so ATC touches demand also at the lowest suggest of the ATC curve amount developed is where MR=MC (Qpc) productive efficiency is accomplished equilibrium amount (Qpc) is where ATC is at a minimum (P=minimum ATC) produce the quantity where MC=ATC if they create at any type of other quantity then the ATC will be better than the price and also they will earn financial losses and also will go out of business in the lengthy run allocatively efficiency is achieved at the profit maximizing quantity (Qpc) the P=MC MSB=MSC this is the socially optimal quantity Monopoly Long RunEquilibrium single firm in the sector because entry is blocked producing a unique product downward sloping demand given that the monopolist has actually sector power because it produces a unique product that no other firms create and the demand also (or P) is greater then the MR D=P>MR long run revenues likely presented on graph as the ACT is listed below the demand (P) curve bereason enattempt is blocked (yellow rectangle) amount produced is where MR=MC (Qm) fertile efficiency is NOT completed equilibrium amount (Qm) is NOT where ATC is at a minimum (P>minimum ATC) they execute NOT produce the amount where MC=ATC at the profit maximizing level of output (Qm) the actual ATC is greater than the minimum ATC because there is no competition the firm does not need to produce in the least expense manner; without competition the firm have the right to charge a much better price and create at a greater ATC and earn greater earnings allocative performance is NOT completed equilibrium quantity (Qm) is NOT at the quantity wbelow P=MC (Qso) at the profit maximizing level of output (Qm), P>MC meaning that there is an underalarea of resources; also bit is being developed monopolists have the right to restrict output to rise the price and also earn better earnings at the socially optimal (alloc. eff.) amount (Qso), profits are not maximized so the monopolist will not create this quantity Monopolistic Competition LongRun Equilibrium many firms in the sector producing similar assets some industry power (price making power) bereason of product differentiation downward sloping demand also for the individual firms however more elastic given that there are many substitutes and the demand also (or P) is better then the MR D=P>MR zero (normal) economic revenues in lengthy run equilibrium bereason of few obstacles to entry so ATC is tangent to the demand curve quantity developed is wbelow MR=MC (Qmc) abundant efficiency is NOT completed equilibrium quantity (Qmc) is NOT wright here ATC is at a minimum (P>minimum ATC) they do NOT create the quantity where MC=,ATC at the profit maximizing level of output ATC is higher than the minimum allocative efficiency is NOT accomplished equilibrium amount (Qmc) is NOT at the quantity wbelow P=MC at the profit maximizing level of output (Qmc), P>MC interpretation that tbelow is an underalplace of resources; as well bit is being created as long as firms have actually some industry power (i.e.


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the demand also is downward sloping) they will certainly maximize revenues by producing a amount that is much less than the socially optimal amount (Qso) Rundown imperfect competition (monopoly, monopolistic competition, and also oligopoly) is a kind of industry failure; the industry fails to accomplish efficiency as we saw in this lesboy ME: we studied industry faientice once we studied externalities in chapter 5; as soon as externalities exists sectors fail to achieve performance ME: in chapter 2 wbelow we stupassed away the financial functions of government, one of the features wregarding attempt to maintain competition ;i.e. to correct industries when they fail to attain efficiency; we also stupassed away this in chapter 18 as soon as we discussed antitrust laws and monopoly regulation since the majority of sectors are imperfectly competitive, does this mean that the many sectors are sector failures? if we just look at the graphs we would need to answer "yes", "technically speaking" yet there are additionally some benefits to imperfectly competitive sectors that additionally have to be considered: the good level of product differentiation offers society through most benefits that might comprise for some of the underalarea of resources (customer company, invention, product development); selection is excellent