- [Instructor] We have
already thought about
the demand curves for perfect
competition and monopolies
and the types of economic
profit that might result in.
And this video, we're
going to focus on something
in between, which we've talked
about in previous videos,
which is monopolistic competition.
So, as you can see in all three scenarios,
we have a similar cost structure.
We have our marginal cost curve
and our average total cost curve
that's at a minimum point
right where it intersects
the marginal cost curve.
But it's very different
whether we're talking
about a monopoly or perfect competition
when it comes to the demand curve.
For perfect competition,
it is one of many firms
with an undifferentiated product
and no barriers to entry.
So, these firms just
have to be price-takers.
Whatever the price is in the market,
each of those firms just
have to take that price.
And that price is going
to be their demand curve
and their marginal revenue curve.
And we've talked about
that, in the long run,
under perfect competition,
none of these firms
are going to be able to
make an economic profit;
that, if they are, they're
going to have more entrants,
which is going to push this price down.
And if they're making
negative economic profit,
then you're going to have
people who are going to exit,
which is going to push line up.
And so, it's going to, in the long run,
be at a point where none of the firms
are making economic profit.
And so, another way to think about it,
where our marginal
revenue curve intersects
with our marginal cost curve,
which for any of these situations,
is the rational amount to produce,
the rational quantity to produce
for a profit-maximizing firm,
that's going to be exactly at a level
where the price is equal
to average total cost,
so you have zero economic profit,
zero economic profit.
Now, there's some interesting
things about this.
We talked about how it's
allocatively efficient
because we're producing at a quantity
where marginal cost is equal to demand.
It's also productively efficient
because we're producing
at the minimum point
of the average total cost curve.
So, it's very efficient from
a productive point of view.
Now, a monopoly is the opposite extreme.
They are the only player in the market
with insurmountable barriers to entry.
And so, their demand curve,
they're the only player,
so you could view this as
the market demand curve,
but it's their demand curve
'cause they're the only product there.
So, at high prices, you have
a low quantity demanded;
and at low prices, you have
a high quantity demanded.
At in multiple videos,
we've talked about that,
in many situations, a monopoly firm
cannot do price discrimination.
It has to charge the same
price to every consumer.
Well, in that situation,
your marginal revenue
is going to go down twice as fast
because, as you go further and further
down the demand curve,
you're lowering the price for everyone.
And we've studied this,
this is all review;
but it never hurts to get more review.
The rational quantity to produce,
and once again, this is true for any firm,
is where marginal revenue
intersects marginal cost.
So, we would produce at that quantity.
And the price at that quantity,
we'd go to the demand curve,
it would be right over there.
And you could see that this monopoly firm
is able to get quite
a nice economic profit
because the average total cost
at that quantity is right over there.
And so, on a per-unit basis,
they're able to make that much
times the number of units.
And so, you have a nice economic profit.
Now, the negative, from a
economic or market point of view,
if you were to be allocatively efficient,
you'd be producing at a quantity
where marginal cost intersects demand.
But that is not happening over here.
And so, you have all of this
deadweight loss right over there.
Now, to help understand
monopolistic competition,
let's say you start as a monopoly;
but now, all of a sudden, the
market dynamics have changed,
where what were insurmountable
barriers to entry
now become low barriers to entry.
What is likely to happen?
Well, you have this nice
economic profit going on here,
so more firms are likely
to enter the market.
And if more firms enter the market,
what is going to happen
to your demand curve?
Well, the demand for your specific product
is going to go down because
there's other people
who are offering similar alternatives.
In monopolistic competition,
you aren't completely undifferentiated.
You might have a brand,
you might have certain
features that are better or worse,
but there are other substitutes
which people could go for,
which are giving you that competition.
So, as more and more people enter,
as you have this economic profit,
your particular demand curve
is going to shift down and to the left.
And so, your demand
curve will keep shifting
until you're no longer able
to get any economic profit.
And so, your demand curve
might go something like this.
Once the firms aren't able
to get economic profit,
well then it doesn't really make sense
for more people to try to enter it.
So, if you started a monopoly,
your demand would shift
to the left, like that,
to the point where you get like that.
And your marginal revenue curve
would look something like this,
it would have twice the slope down,
so this would be your
marginal revenue curve.
And notice what has now happened.
It is now rational for you to be producing
at a quantity where the
price that you are getting
is equal to your average total cost.
So, once again, as more
and more people entered,
because you were getting economic profit,
and the players in this industry
were getting economic profit,
the demand curve has shifted left,
so now there is zero economic
profit in the long run.
Now, once again, this is a situation
here you have deadweight loss.
This is not allocatively efficient.
You're not producing at a level
where marginal cost is equal to demand.
It's also not productively efficient.
To be productively
efficient, you'd be producing
at a quantity where you're
at the minimum point
of your average total cost curve.
And so, this difference right over here,
we could view this as the quantity for,
I'll call it efficient scale,
this right over here, this distance,
you could view this as excess
capacity, excess capacity.
Now, one thing that might be
a little bit counterintuitive
is, in previous videos, we talk about how,
hey, as people enter and exit a market,
it would shift the supply curve.
But here, we're shifting the demand curve.
Well, when people enter
and exit the market,
it shifts the supply curve
for the entire market.
It would not shift the demand
curve for the entire market.
But what we have drawn over here
is not the demand curve
for the entire market.
What we have drawn here
is the demand curve
for this particular firm's product.
So, as there's more and more
entrants in the entire market,
the demand for this particular
firm's products are going down.
