Monopolistic competition and economic profit Why it is hard for a monopolisitc competitor to make economic profit in the long run
Monopolistic competition and economic profit
- What I want to do in this video is to think about why is so hard for a monopolistic
- monopolistic competitor to make money in the long run. And this reminds us monopolistic competitors much closer to perfect competition that is to monopoly.
- What it means is you have monopoly in your differentiate product,
- but eventually other people are going to make substitute product so that they can make exactly your product, they won't, can’t reidentical and they might eat it into your mind.
- And to understand that let us draw the demand curve for a marketing which,
- in which monopolistic competition is going on,
- I will draw it nice and big, this exercise right over here I’m gonna plot dollars, per dollars, per dollars per unit so prices revenue per unit and we’ll have costs per unit and things like that.
- And in this exercise we are gonna have quantities produced till the given period of time and we are speaking fairly general term over here.
- Now let’s assume, let’s assume that our monopolistic competitors over here is Apple and its ipads.
- Apple ipads. I wanna, I wanna emphasize I am not making any accusation that Apple is a monopolist here.
- They just have differentiate products so they are monopolistic competitors here.
- They have a monopoly in ipad. They don’t have monopoly in tablet computer or in computer in general. But only they can sell ipads.
- So let’s draw a demand curve in the short run for ipads and I will make leaner to make it simple.
- I will draw a little better that that so let’s say the demand curve looks something like that.
- So that is our demand curve, and we know that if that’s demand curve, and remember we are talking about market for ipad,
- not the market for all the tablet computers.
- Apple is the monopolist in the market for ipads, so its marginal revenue will have twice the slope of this demand curve.
- So we’ll look something like that, that’s is Apple’s marginal revenue curve.
- And let us think about the short-run economic profits in the given period of time whatever this quality period of time is.
- Let’s draw its costs. So first I will draw, let me draw it’s marginal cost.
- So its marginal cost maybe look something like this. That’s their marginal cost.
- And then to do average total costs.
- Up here where you have very low quality, most of your cost are fixed cost, but you divide it by very small quality.
- So you are going to have a very high average total cost .
- It’s gonna get lower, lower and lower as long as the cost on each incremental unit is lower that the average.
- And the cost on the edging incremental unit marginal cost curve.
- So as long as the average total cost is higher, then the marginal cost curve, then your, this’s gonna to be a down or sloping.
- And at some point, they are gonna to be equal to each other.
- And now each incremental unit that you add on it is increasing average because it each incremental unit cost is more than the average so it gonna cost everything to average,
- it gonna cost everything to average up.
- And this actually right over here should be the minimum point on our average total cost curve.
- So given the way I have drawn things, what is Apple’s short-run economic profits?
- Well we just have to think about it
- quantities to produce
- so it’s defining a produced one, the marginal revenue much higher than the marginal cost is gonna make the economic profits on that unit is going to keep producing because it continues to be true,
- continues to be true all the way to this point, right over here. It doesn’t wanna produce more than that because the cost,
- the opportunity cost on each incremental unit is higher on the revenue on that.
- You can take economic lost. So you gonna produce it here.
- And that quantity, we call it Q star right over there.
- And that quantity this is the price they can charge in the market going to the demand curve.
- I just went straight up to the demand curve right over here.
- This is the price they can charge in the market.
- And their average, or you can draw that here is the revenue per unit and we have our average cost per unit right over here, and average total cost.
- So this is their average economic profit per unit.
- And if we multiply that, times the total number of unit, if we multiply the total number of units, the area of this rectangle over here is going to give total economic profit, total, economic, economic, economic, profit.
- Now in all things, if someone, if the rest of the world sees the economic profits, they will say “Wow, that’s good. You know, people are doing better in that market than their opportunity cost.
- So their other competitors thought: “I can’t produce ipads, but I can start making competitive products. ”
- So you will see players like Samsung, and we are seeing this, sitting here in 22, and this is a kind of a working progress for these competitors right over here.
- Samsung, HTC, HP, all the tablet manufacturers, all the computer manufacturers, they are pairing up with the operating system manufacturers, like Microsoft and Googles, Andriod.
- They are making competitive products and on the top of it, they are marketing it.
- They are marketing it heavily. They are marketing. They are trying to market the products as aggressively as possible.
- So it’s their products to become more and more comperable.to an Ipad Maybe even better than certain inventions either cost or futures and they market heavily.
- In the long-run what’s going to happen to Apple’s demand curve?
- Well at any given price, less will be demanded and so demand curve will shift.
- The demand curve will shift to the left.
- So we could end up with the new demand curve, so there is a different shift of blue, that looks something, that looks something , that look something like that, so this is our new demand curve, or maybe we should say the long-run demand curve after these people have made their products better in having marketed heavily.
- If that's the new long-run demand curve, then our long-run marginal revenue curve was going to have twice the slope of that, so it's going to look something like this--the twice slope is gonna hit the line, is gonna hit the right about. is going to look, it can do a better job than that.
- So our new marginal revenue, we did it in slightly different colour.
- I will do it pink. Our new marginal revenue curve will look something like that.
- So this is long-run marginal revenue, long-run marginal revenue curve.
- So now what is the quantity for Apple to produce?
- Well now it's gonna make, it's gonna make economic profits, economic profits, economic profits all the way until this point right over here.
- So now we have this new-- I will call it long-run, long-run quantity. Maybe I will call it.
- Let me do it in different colour. I'm using that pink too much. Long-run quantity right over there.
- And to figure the revenue per unit or the price at that quantity we just go up to the demand curve, our new demand curve.
- Remember our long-run demand curve, it's right over there.
- It looks like at least the way I've drawn it at the price has change much.
- We've got the same price. But now what's our economic average profit per unit?
- Well the way I've drawn it, the average total cost right over there, are right about what that price is.
- So our average economic profit per unit goes down to zero.
- There is, over here we have this nice green high.
- Now we have no high any more, even though we are selling a good number of unit, our average economic profit per unit is zero.
- So in set of area over there, we are going to have the area of a line which is actually a zero.
- So now, we have a zero, zero economic, economic, zero economic profits.
- So the important thing to realize from monopolistic competitors-- this one happens overnight, I mean someone of you are arguing here in 22, earlier 22,
- Apple is still generating economic profits.
- It's always important to realize economic profits is different than accounting profits.
- Accounting profits can be positive.
- Economic profits can be zero when accounting profits is positive.
- So if you can have a economic loss, then still have accounting profits.
- But some people would argue right now that Apple's still making profits beyond even their opportunity cost and this is actually a working progress right now in 22 that demand curve was shifting to the left. But eventually.
- all of the economic profit will be eaten up, and they will be less incentive for all of these players to be as aggressive.
- So the important thing to realize with the monopolistic competitors is sure their curves look like a monopolist. But the competition doesn't happen in terms of supply of Ipads.
- None of these players can supply Ipads. The competitive part happen to the all of these people producing substitutes and being aggressive about it and eating into the monopolistic competitors' demand.
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