A Monopolistically Competitive Firm in the Short and Long Run a Observations (long-run) o Profits will attract new firms to the industry (no barriers to entry o The old firm's demand will decrease to diR o Firm's output and price will fall o Industry output will rise o No economic profit (P=AC) o P>MC- some monopoly power Chapter 12 Slide 11
Chapter 12 Slide 11 n Observations (long-run) l Profits will attract new firms to the industry (no barriers to entry) l The old firm’s demand will decrease to DLR l Firm’s output and price will fall l Industry output will rise l No economic profit (P = AC) l P > MC -- some monopoly power A Monopolistically Competitive Firm in the Short and Long Run
Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium Perfect Competition Monopolistic Competition $/Q $/Q Deadweight MC AC loss MC AC P DE MR D LR MRL Q Quantity Quantity
Deadweight MC AC loss Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium $/Q Quantity $/Q D = MR QC PC MC AC DLR MRLR QMC P Quantity Perfect Competition Monopolistic Competition
Monopolistic Competition a Monopolistic Competition and economic Efficiency o The monopoly power(differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC=D, consumer surplus would increase by the yellow triangle Chapter 12 Slide 13
Chapter 12 Slide 13 Monopolistic Competition n Monopolistic Competition and Economic Efficiency l The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle
Monopolistic Competition a Monopolistic Competition and economic Efficiency o With no economic profits in the long run the firm is still not producing at minimum AC and excess capacity exists Chapter 12 Slide 14
Chapter 12 Slide 14 Monopolistic Competition n Monopolistic Competition and Economic Efficiency l With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists
Monopolistic Competition ■ Questions 1) If the market became competitive what would happen to output and price? 2)Should monopolistic competition be requlated? Chapter 12 Slide 15
Chapter 12 Slide 15 Monopolistic Competition n Questions 1) If the market became competitive, what would happen to output and price? 2) Should monopolistic competition be regulated?