Topic 8: Monopolistic Competition Flashcards
Explain this model.
The CC curve is the cost curve - with additional firms, fixed costs increase, increasing average cost.
The PP curve is the price setting curve, with additional firms there is more competition, and lower prices.
The zero profit condition means that N* firms will exist.
What is the pricing model used in the monopolistic competition model in this course?
S is total output.
P-bar is average price in the market.
Show what happens when free trade is established in this courses MonoComp model.
The CC curve shifts down, as each firm is selling to more consumers -> the scale allows it to produce at lower average cost. PP is unchanged.
What is the result of heterogenous productivity in the MonoComp model?
- There will be profits!
- In the free trade result, productive firms win, unproductive firms lose - some exit.
Explain these graphs
To an individual firm, demand is less willing to accept a higher price from competition, but the volume at lower prices increases due to the larger market.
High productivity firms will have increased profits from the extra volume.
But lower producitivity firms will have lower profits, and a subset will exit the market from the fall in the price.
Show how heterogenuously productive firms can be effected by trade costs.
The productive firm serves both the domestic and export market.
The unproductive firm serves only the domestic market.
