Monopolistic Competition- Short Run and Long Run- Micro 4.4

Summary

In this video, Mr. Clifford explains monopolistic competition, highlighting how it blends characteristics of both monopoly and perfect competition. Firms in this market are price makers with differentiated products, leading to downward-sloping demand curves. In the short run, firms can make economic profits, but in the long run, new entrants erode these profits due to low barriers to entry. Ultimately, the market reaches long-run equilibrium where firms make no economic profit, and the demand curve shifts due to increased substitutes. Mr. Clifford also emphasizes the importance of understanding key graphs and concepts for exams.

Takeaways

• 😀 Monopolistic competition combines elements of both monopoly and perfect competition, with firms having some price-making power but easy market entry.
• 😀 Like a monopoly, firms in monopolistic competition are price makers and have downward-sloping demand curves, meaning they don't face perfectly elastic demand.
• 😀 In the short run, monopolistically competitive firms can make economic profit, similar to monopolies, due to differentiated products and some control over prices.
• 😀 The presence of economic profit in the short run attracts new firms into the market due to low barriers to entry, leading to increased competition.
• 😀 As new firms enter, the demand curve for existing firms shifts left, reducing their market share and causing their economic profit to decrease.
• 😀 In the long run, monopolistically competitive firms make zero economic profit, as new firms continue to enter and erode profit potential.
• 😀 The long-run equilibrium for monopolistically competitive firms occurs when the average total cost (ATC) curve is tangent to the demand curve at the point where marginal cost (MC) equals marginal revenue (MR).
• 😀 The entry of new firms and the resulting shift in demand cause monopolistically competitive firms to operate at a level where they make no economic profit in the long run.
• 😀 The graph of a monopolistically competitive firm in the short run looks similar to a monopoly's graph, but the long-run graph shows no profit due to the entry of new competitors.
• 😀 It's important to understand how the entry of new firms affects demand and the long-run equilibrium, leading to zero economic profit for firms in monopolistic competition.

Q & A

What is monopolistic competition?

Monopolistic competition is a market structure where many firms offer similar, but not identical products. Firms are price makers with some control over their prices, unlike perfect competition where firms are price takers.

How is monopolistic competition similar to a monopoly?

Like a monopoly, firms in monopolistic competition are price makers, meaning they have some control over the price they charge. Their demand curve is downward sloping, similar to a monopoly, and does not equal marginal revenue.

How does monopolistic competition differ from perfect competition?

Unlike perfect competition, where products are identical and firms are price takers, monopolistic competition involves differentiated products and firms that have some control over prices. Additionally, entry barriers are low in both, but monopolistic competition results in no long-term economic profit due to firm entry.

What happens in the short run for a monopolistically competitive firm?

In the short run, a monopolistically competitive firm can make economic profit, as shown in the graph where total revenue exceeds total cost. This is similar to a monopoly graph.

Why do firms enter the market in the long run?

Firms enter the market in the long run when they observe economic profit being made by firms already in the industry. This entry increases competition and leads to a reduction in demand for each individual firm.

What does the graph look like when a firm moves from short run to long run?

In the long run, as more firms enter the market, the demand curve shifts leftward, reducing the demand faced by each firm. Eventually, the firm's average total cost (ATC) will meet the demand curve at the quantity where marginal cost equals marginal revenue, resulting in no economic profit.

Why does the demand curve shift left in the long run?

The demand curve shifts left as more firms enter the market, providing more substitutes for consumers. This increases competition, which causes the demand for each firm's product to decrease.

What does 'no economic profit' mean in the long run?

No economic profit means that a firm's total revenue equals its total cost, including both explicit and implicit costs. In the long run, monopolistically competitive firms will earn zero economic profit due to competition.

What role do substitutes play in monopolistic competition?

Substitutes are key in monopolistic competition because they allow consumers to choose from different products. This makes each firm's product somewhat unique, but also affects the price and demand they can command.

What should you be able to do for your test regarding monopolistic competition?

You should be able to draw the short-run and long-run graphs for a monopolistically competitive firm, understanding how economic profit in the short run leads to firm entry, and how the demand curve shifts in the long run, resulting in zero economic profit.