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Video transcript

what I want to do in this video is think about why it's so hard for a monopolistic monopolistic competitor to make money in the long run and just as a reminder monopolistic competitor it's much closer to perfect competition than it is to a monopoly what it means is is that you have a monopoly on your differentiated product but eventually other people are going to make substitute products they can't make exactly your product and what can't be identical and it might eat into your demand and to understand that let us draw the demand curve for for a market in which in which monopolistic competition is going on I'll draw it nice and big and so on this axis right over here I'm going to plot dollars per dollars per unit and so price is revenue per unit and we'll have cost per unit and things like that and in this axis I'm going to have quantity produced in a given period of time and we're gonna speak in fairly general terms over here now let's assume let's assume that our monopolistic competitor right over here is Apple and it's iPads Apple iPads and I want to I want to emphasize I'm not making any accusation accusations that Apple is a monopolist here they just have a differentiated product and so they are monopolistic competitors here they have a monopoly in iPads they don't have a monopoly in tablet computers or in computers in general but only they can sell iPads and so let's draw the demand curve in the short run for iPads and I'll make it linear to make things simple let me draw a little bit better than 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 the demand curve and and we're talking about the market for iPads not the market for tablet computers Apple is a monopolist in the market for iPads so it's marginal revenue will have twice the slope of this Mart of this demand curve so it will look something like that that is Apple's marginal revenue curve and then think about its short-run economic profits in a given period of time whatever this quantity per period of time is let's draw its costs so first I'll draw let me draw its marginal costs so its marginal costs might look something like this that is their marginal costs and then to do average total costs up here when you have very low quantity most of your costs are fixed cost but you're dividing it by a very small quantity so you're going to have a very high average total cost it's going to get lower and lower and lower as long as the cost on each incremental unit is lower than the average and the cost on each incremental unit is a marginal cost curve so as long as a total average total cost is higher than the marginal cost curve then you're going that's going to be downward sloping and at some point they're going to be equal to each other and now each incremental unit that you add on is going to increase the average because the it's each incremental units cost is more than the average so it's going to cause everything to average it's going to cause 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 profit well we just have to think about its optimal quantity to produce so it's definitely gonna produce one the marginal revenue much higher than the marginal cost is going to make economic profit on that unit it's going to keep producing because that continues to be true continues to be true all the way into this point right over here and it doesn't want to produce more than that because then the cost the Ekadasi and each incremental unit is higher than the revenue on that so you're going to take an economic loss so you're going to produce right over there and at that quantity so I'll call that Q star right over there at that quantity this is the price that they can charge in the market going to the demand curve I just went straight up to the demand curve over there this is the price that they can charge in the market and their average or you could view that as their average revenue per unit and then we have our average cost per unit right over here an average total cost so this is their average economic profit per unit and if we multiply that times the total number of units if we multiply times the total number of units the area of this rectangle right over here is going to give total economic profit total total economic economic economic profit now in all things if someone if the rest of the world sees economic profit there's like wow that's a good you know people are doing better in that market than their opportunity costs and so other competitors say well I can't produce iPads but I can start making competitive products so you'll see players like Samsung and we are seeing this sitting here in 2012 and this is kind of a work in progress for these competitors right over here Samsung HTC HP all the tablet manufacturers all the computer manufacturers and they're pairing up they're pairing up with the operating system manufacturers like Microsoft Microsoft and Google's Google's Android and they are making competitive products and on top of it they are marketing it they're marketing it heavily they are marketing they're trying to market the products as aggressively as possible and so as their products become more and more comparable to an iPad or maybe even better in certain dimensions either cost or features and they market it 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 the demand curve will shift the demand curve will shift to the left and so we could end up with a new demand curve I'll do it in a different shade of blue that looks something that looks something like that looks something like that so this is our new new demand curve or we should say maybe our long-run demand curve after these people have made their products better and have marketed heavily if that's the new long-run demand curve then our long-run marginal revenue curve will is going to have twice the slope of that so it's going to look something like this so if it's twice the slope it's going to hit the line it's going to go hit write about it's going to look I can do a better job than that so our new marginal revenue we do in a slightly different color I'll do it in pink our new marginal revenue curve will look something like that so this is long-run marginal revenue long-run marginal revenue curve and so now what is the optimal quantity for Apple to produce well now it's going to make its going to make economic profit economic profit economic profit all the way until this point right over here so now we have this new I'll call it long run long run quantity or maybe I'll call it let me do it a different color I'm using that pink too much long run quantity right over there and to figure out the revenue per unit or the price and that 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 that the price hasn't changed much we've got the same price but now what is our average economic profit per unit well the way I've drawn it the average total cost right over there our write about what that price is so our average economic economic profit per unit goes down to zero there is over here we had this nice green height now we have no height anymore and even though we're selling a good number of units our average economic profit per unit is zero so instead of an area over there we're going to have the area of a line which is essentially zero so now we have zero zero economic economic zero economic profit so the important thing to realize for monopolistic competitor and this won't happen overnight I mean some would argue that sitting here in 2012 early 2012 Apple is still generating economic profit and it's always important to realize economic profit is different than accounting profit accounting profit can be positive economic profit can be zero when accounting profit is positive so if you're if you have if you run you can even have an economic loss and still have accounting profit but some people would argue that right now apples still making profits above and beyond even their opportunity cost and this is actually a work in progress right now in 2012 that these that the demand curve is shifting to the left but eventually it all of the economic profit will be eaten up and there will be less incentive for all of these players to be as aggressive so the important thing to realize what the monopolistic competitor is sure they they're 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 happens with all of these people producing substitutes and being aggressive about it and eating into the monopolistic competitors demand
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