8 Oligopoly Most oligopolists produce differentiated products Key features of oligopoly barriers to entry- size of the barriers varies from industry to industry. But monopolies are likely to achieve greater economies of scale and have more funds for investment and research and development. ![]() comparison with monopoly freedom of entry for new firms and the lack of long-run supernormal profits under monopolistic competition help keep prices down for the consumer and encourage cost saving. Firms under monopolistic competition are said to have excess capacity Q 1 - Q 2 Excess capacity (under monopolistic competition) - in the long run, firms under monopolistic competition will produce at an output below their minimum- cost point. By producing more, firms would move to a lower point on their LRAC curve. Firms will not be producing at the least-cost point. Less will be sold and at a higher price. A crucial assumption here is that a firm would have the same long-run average cost ( LRAC ) curve in both cases. ![]() MC A, additional advertising will add to profit The public interest comparison with perfect competition It will produce the lower output of Q 2 at the higher price of P 2. The optimal amount of advertising is where the revenue from additional advertising ( MR A) is equal to its cost ( MC A). Advertising is to sell the product- informing the consumer of the product’sĮxistence and availability, deliberately trying to persuade consumers to purchase Developmen t to produce a product that will sell well (in high or potentially highĭemand) and that is different from rivals’ products (relatively inelastic demand due MR = MC AR = AC under-utilisation of capacity in long run Limitations of the model imperfect information difficulty in identifying industry demand curve entry may not be totally free indivisibilities importance of non-price competition - competition in terms of product promotion (advertising, packaging) or product development The firm’s demand curve settles at D L, where it is tangential to the firm’s LRAC curve. Normal profits remain: when there is no further incentive for new firms to enter. The demand for the established firms falls, demand ( AR ) curve shifts to the left, and will continue doing so as long as supernormal profits remain and thus new firms continue entering. As new rivals enter take some of the customers away from established firms. MR = MC long run: supernormal profits competed away. Equilibrium of the firm short run: possibility for supernormal profits, the diagram will be the same as for the monopolist, except that the AR and MR curves will be more elastic. A situation where a firm faces a downward-sloping demand curve. Assumptions of monopolistic competition many or several firms- Independence (of firms in a market) - where the decisions of one firm in a market will not have any significant effect on the demand curves of its rivals free entry differentiated product- where one firm’s product is sufficiently different from its rivals’ to allow it to raise the price of the product without customers all switching to the rivals’ products. Imperfect Competition 8 Monopolistic Competition- a lot of firms competing, but where each firm does nevertheless have some degree of market power (hence the term ‘monopolistic’ competition): each firm has some choice over what price to charge for its products. The lowest price in the market is the point where AR=AC - the point where normal profits are being made.Chapter 8. Profits will be competed away until the lowest price in the market. The firms will therefore experience a decrease in demand. The AR (Demand) and MR curves will shift to the left - this is because individual firms are losing customers to new firms. But what happens to the firm's revenue and cost curves? What happens? Similar to perfect competition, the market supply curve will shift to the right because of the increase in firms. That means new firms are going to enter the market - they can do this easily because there are no or low barriers to entry in this market model. What happens when people hear about the supernormal profits being made in this industry? People have the incentive to start their own firms and join the market and have a share in the profits. So in the short-run, supernormal profits can be made.
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