LONG RUN COMPETITIVE EQUILIBRIUM

1. LONG RUN COMPETITIVE EQUILIBRIUM

2. One Price Monopoly Versus Perfect Competition

3. Price Discrimination Prices and Output

4. EFFICIENCY AND COMPETITION • P = MC: Allocative efficiency • What people are willing to give up equals what people must give up • P = min ATC: Productive efficiency • The commodity is produced at the lowest possible price. Output per input is maximized. • All costs must be paid by the firm. • All benefits must be enjoyed by the consumer

5. Monopoly in Long-run Equilibrium

6. Efficiency and Monopoly • P>MC: No allocative efficiency • People are willing to give up more than must be given up. • P>min ATC: No productive efficiency • The commodity is not produced at the lowest possible price. Output per input is not maximized • The firm may earn more profits than necessary in the long-run

7. Monopolistic competition in short-run equilibrium

8. Efficiency and Monopolistic Competition in the short-run • P>MC: No allocative efficiency • People are willing to give up more than must be given up. • P>min ATC: No productive efficiency • The commodity is not produced at the lowest possible price. Output per input is not maximized • BUT the profits will not persist in the long-run

9. Monopolistic competition in Long-run Equilibrium

10. Efficiency and Monopolistic Competition in the long-run • P>MC: No allocative efficiency • People are willing to give up more than must be given up. • P>min ATC: No productive efficiency • The commodity is not produced at the lowest possible price. Output per input is not maximized • BUT the profits have been reduced to a normal return. Alternative opportunities are covered and no more.

11. NO DEAD WEIGHT LOSS IN PERFECT COMPETION PRICE S= SUM OF MC’s CS P PS D Q QUANTITY

12. DEAD WEIGHT LOSS IN MONOPOLY OR MONOPOLISTIC COMPETION PRICE MC DEAD WEIGHT LOSS CS P P =MC PS MR D Q QUANTITY

13. Dead Weight Loss In Monopolistic Competition with Close Substitutes PRICE MC DEAD WEIGHT LOSS CS P D P=mc PS MR Q QUANTITY

14. Monopolistic Competition and Perfect Competition • In monopolistic competition, products may have very close substitutes. • The closer the substitute the more elastic the demand curve. (The less the firm can raise price without customers going to the substitute.) • The price set by the firm maybe very close to the MC and the deadweight loss may be small • (Consumer surplus is small, because the benefit from a Louis’s pizza is very little more than the benefit from a Wheel pizza, for most consumers.)

15. How bad is monopolistic competition? • If each firm has very close substitutes, the price charged by the monopolistically competitive firm will be very close to the price which equates price and marginal cost. • Firms often compete by introducing products which are similar to successful products of competitors

16. Circumstances of Monopolistic Competition • Each firm has excess capacity, and would like to sell more at the price they have set. • Each firm wants to shift its demand curve out. • Each firm wants to make its demand curve more inelastic • They want to be able to raise their price and lose fewer customers.

17. Dynamics of Monopolistic Competition • Firms want a larger demand for their product. If their demand shifts out, their profits will rise. • Firms want a more inelastic demand curve. If they can raise the price with only a small decline in quantity sold, their profits will rise

18. Dynamic Monopolistic competition • Firms ADVERTISE. • They hope to increase demand – shift the demand curve out. • They hope to create brand name loyalty – Only Nike shoes will due, no matter what they cost. • Firms DEVELOP more appealing products. • Low fat subway sandwiches • Blueberry messenger systems • Running shoes with air cushions in them • If Elton John or Ashley MacIsaac are not longer hot, perhaps Avril or David Matthews will have a big market.

19. Advertising and Product Development • Both add to the costs of the firms • If successful, they add to the revenues of the firms • Firms must balance the addition to costs against the anticipated addition to revenues

20. Workings of Capitalism • If there is entry to an industry, excess profits will be competed away. • Competition in the music, book, and film industry as well as in fast foods and running shoes takes the form of developing new products and advertising them. • P > MC but variety is the spice of life.

21. Drug Companies • Even here, firms have the incentive to develop new products which may be useful. • If one drug is highly successful and profitable, other firms may develop similar products that do not infringe on patents, if possible. • There are many drugs that lower cholesterol. • (But I’m not sure we achieve the best possible results.)