Hey there! We're going to do chapter 13. We'll 
call this part 1.  Chapter 13 deals with
the monopolistically competitive market
structure and the key to understanding
the monopolistically competitive firm is
understanding that their market power
comes from their ability to
differentiate their product.  Okay, keep
that in mind as we go along, I'm going to
call monopolistically competitive firms
mono comp firms just because
monopolistically competitive is a
mouthful.  So when you think back to mono
comp firms there were lots of small
firms, they were all differentiating
their product, there was ease of entry
into their markets, and they have some
pricing power-- some market power.  They're
too small to gain market power because
of their size, so the key as I said in
our intro is that they are all going to
differentiate their product.  You are
going to have all of these small, kind of
mom-and-pop, very very competitive firms
looking for an angle.  Clothing companies
are going to offer up slightly different
logos and brands; lawn care services are
going to maybe edge your sidewalks, or
they're going to, you know, mulch for you. 
They might all offer slightly different
things to keep you coming back.  Once you
want that thing that they're offering
you then you are hooked on their
differentiation,  and in that sense they
become sort of a tiny little monopolist....
because if you want that special thing
they've got, thne you have to go to them now. 
They don't get to act like a monopolist
and jack up their price way high because
there are still a lot of close
substitutes, but the fact that they can
raise their price at all and not lose
all of their customers sets them apart
from perfect competition.  Ok so that's
where the strange name comes from. 
Monopolistic Competition if you think
about it it's kind of an oxymoron, but
this is what they have in mind.
Little firms trying to generate market
or monoply
power by differentiating.  This is going
to give them some pricing power.  Okay, so
as an example-- clothing--- how many of you
guys buy a specific type of shoes
because that shoe runs wide and you
maybe have really wide feet, or maybe you
buy another brand that's very narrow and
has a small heel because that works well
for you, and you're very loyal to that
brand.  What you're loyal to is the
differentiation that they're offering
you, and if you want it it looks like you
have to come to them to get it,  right?
This is why they can raise their price
without losing you.  That's the secret to
mono comp.  So what does this mean when
we have a firm that can start to raise
its price?  It's going to impact our
demand curve and our marginal revenue
curve.  The demand curve for the perfectly
competitive firm was perfectly elastic--
horizontal flat line-- that's not going to
be the case now, because if they want your stuff-- your special differentiation--
they have to come to you.  So I've got the
demand curve here and you can see the
straight line, and I'm going to draw that in
right now.  There's our demand curve, but
what I want you to recognize is that if
you want to sell more products
you can't keep selling more and more
product at the same price...right?.. since
you're on a downward sloping demand
curve, if you choose a really high price
you don't sell any. If you want more
customers you have to start lowering the
price, then you sell some products.  So all
I've done to get to total revenue is
basically taken P times Q... right?... the
quantity you sell multiplied by the
price you're getting it at.  Keep in mind
you have to sell all of the quantity at
the same price, so when we decide to
lower the price to $14 this is going to
generate 14 dollars in total revenue for
us now.  If we want to sell a second unit
the only way we're going to be able to
do that is if we are lowering the price,
so we sell two units at $13 now and
that's going to generate us $26,
so on and so forth down the line. In
order to continue finding more and more
customers we have to keep lowering our
price and that of course means that
you're going to find more and more
people who are willing and able to buy.
This is going to generate all of our
total revenue numbers.  Now if you'll
notice revenue is rising all the way to
here and it stalls out between unit
number seven and eight and then it
starts actually falling.  So we're going
to be able to talk about marginal
revenue as something separate than total
revenue and separate from price.  For the
perfectly competitive firm price was
always equal to marginal revenue because
every time you sold another unit it
sold for the price.  That's not the case
anymore here.  Our first one is going to
sell for $14,  and hence generate us 14
dollars in revenue when we choose to
expand output to 2.  By expanding output
by one unit we actually only generated
12 extra dollars, so marginal revenue is
12 even though price is 13, and if you
look at this this continues on this way. 
By expanding output to 3 selling 3 units
at 12 actually only generates 10 extra
dollars in revenue for us, and you can
follow this along here.  Marginal revenue
is going to peak there at unit number 7..
8
I'm sorry.. and then it's going to
actually go negative.  So if you were to
start graphing marginal revenue at every
single Q.... marginal revenue cannot be the
same as the demand curve, because our P's
and our MRs are not the same numbers.  So
what we're going to see is that the
marginal revenue for a straight-line
demand curve is always twice as steep
as the demand curve.  Demand and marginal
revenue for any of the imperfectly
competitive market structures: mono comp,
oligopoly, or monopoly all are going to
have downward sloping demand curves and
marginal revenue curves that are twice
as steep.  So what does this mean for us
in terms of Q star.  I'm going to go ahead
and I'm going to draw in right away our
marginal revenue curve, which you know is
going to be twice as steep; and I also
need to put in a marginal cost curve;
because if we're going to follow our
golden rule and B equals MC, then we need
to find where our MB marginal revenue in
this case is equal to our MC.  When you
find that I need you to jump down and
grab your Q star.  That's how you're going
to get Q star in any of the imperfectly
competitive market structures... and the
same logic applies if MR is greater
than MC, then you should be making more
quantity. When MR is equal to MC you're
at your optimum, and if MR is less than
MC then you of course have jacked it all
up..... right?.... you have not done the right
thing.  You're making too much.  So any of
these units between 0 and Q right over
here they're too low-- you're not at Q
star yet.   Q star's of course this guy in
green and any of these units between Q
star and out to here are these ones.  They
would have smaller marginal revenues for
any Q than the marginal costs associated
with them, so you wouldn't ever want to
make these.  So how does this change our
discussion of profit?  When we're talking
about profit we are still dealing with
your basic profit equals total revenue
minus total costs... okay?
Total revenue is still P times Q.  Total
cost is still going to be ATC times Q,
and we just need to go and find
where were at now.  So just like I told you always
with any of these start out where MR
equals MC.  That intersection is going to
help you find your Q star, and from our Q
star we need to now figure out what is
our average total cost...and what price do
we get to sell it at.  In order to find
the price you have to go up to the
demand curve, because the demand curve is
the relationship between Q and P.  If you
choose to make this Q this is the P that
you will be able to charge for it... okay?...
that gives us our green box like we've
done before and you can go ahead and
figure out the math the same way that we
have previously.  So let's say that this
is a thousand units at eight dollars.  Of
course P times Q here then is 8,000... and
when we want to figure out our total
costs we are going to take our Q star
and we are going to go up until we run
into our ATC... and that is going to give
us our red box.  Lucky for us we've got
more total revenue than total costs and
this is of course our profit ...okay?... So
let's say our total costs were five...uh... if
our total costs were five then five
times a thousand would give us our total
costs of five thousand, and of course
profit would be equal to three thousand
dollars.  The critical thing you have to
remember is when you're getting your P for
your total revenue box you've got to go
up to the demand curve and grab it off
of the demand curve.... okay? ATC works the
same way, all right.   Now monopolistically
competitive firms often take losses just
like perfectly competitive firms.  So if
you're in a situation where the ATC is
ever outside of the demand curve you
know that you're dealing with a loss....And
the reason that you know that is because
the minute that you go and you find your
q-star [you are going to go to MR equals
MC... you're going to go down and grab your
profit-maximizing level of output... and
you're going to go up to the demand
curve to get your P... (P times Q gives you
the area of your total revenue)] and you've
got a problem because you can see
automatically that you are not going to
generate a green box that is ever going
to be as big as your red box... because when
you jump up here to your ATC from your Q
star you're going to see that your red
box is bigger than your green box. 
There's a loss,  so this area here
represents an economic loss,  and of
course in the long run firms we're going
to want to get out. In the short-run
they'd go through the same sort of
shutdown analysis that we talked about
in Chapter 12
