Challenges for Monopolistic Competitors in the Long Run

Key Concepts

• Monopolistic Competitor: Closer to perfect competition than a monopoly.
  • Possesses a monopoly in a differentiated product.
  • Faces competition from substitute products over time.

Demand and Cost Curves

• Demand Curve: Represents the market's demand for a differentiated product (e.g., Apple iPads).
  • In the short run, the demand curve indicates the price consumers are willing to pay for various quantities.
• Marginal Revenue Curve: For a monopolist, this has twice the slope of the demand curve.
  • Indicates revenue earned for each additional unit sold.
• Marginal Cost Curve: Indicates the cost of producing one more unit.
• Average Total Cost Curve:
  • High at low quantities due to fixed costs spread over fewer units.
  • Decreases as quantity increases up to a point, then rises.
  • Reaches minimum where it intersects the marginal cost curve.

Short-Run Economic Profit

• *Optimal Quantity (Q)**: Where marginal revenue = marginal cost.
  • Beyond this point, producing more units results in loss.
• Price at Optimal Quantity: Determined by the demand curve.
• Economic Profit: The difference between average revenue per unit and average total cost per unit, multiplied by total units sold.

Long-Run Implications

• Entry of Competitors: Other firms (e.g., Samsung, HTC, HP) produce substitute products, often pairing with operating systems like Android or Windows.
• Impact on Demand: As substitutes improve and are marketed effectively, the original firm's demand curve shifts left.
• Long-Run Demand Curve: Shifts left, leading to lower quantities demanded at any given price.
• Long-Run Marginal Revenue Curve: Follows the shifted demand curve.
• Long-Run Quantity: New optimal quantity where marginal revenue = marginal cost.

Zero Economic Profit in Long Run

• Price Adjustment: In the long run, price may remain similar, but the firm's average total cost equals average revenue per unit.
• Zero Economic Profit: Occurs when average total cost equals average revenue per unit at the long-run optimal quantity.
  • Economic profit per unit is zero, even if accounting profit is positive.
• Sustainability: Economic profit being zero means less incentive for aggressive competition among substitutes.

Important Distinctions

• Economic Profit vs. Accounting Profit:
  • Economic profit includes opportunity costs and can be zero even with positive accounting profit.
  • Accounting profit does not account for opportunity costs.