Monopolistic Competition Long Run Equilibrium Chapter 17 Pages

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 Competitive Markets P = MC (always) P = min of ATC (long run) (Efficient Scale Production) 3 Market Structures P > MC P > min of ATC

SHORT RUN: Monopolistic Competition LONG RUN: Monopolistic Competition 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 P1P1 Q1Q1 E1E1 Profit

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

Strong Dollar