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Micro_Module 67-31.pptMicro_Module 68-32.pptHow does the demand curve work in the long run?
How does the demand curve work in the long run?
If there are profits, more competition will enter the market and thus there will be more substitutes. If there are more substitutes the demand curve will become more elastic which will cause the price to fall and output to fall. The demand curve will rotate downwards which acts like a shift of the demand curve to the left. It will keep shifting until the demand is flat enough to be tangent to the ATC. Each firm will have a smaller share of the consumers than before. The demand for monop. comp. doesn't have the same determinants as a demand for the market. The determinants for monopolistic competition are entry and exit of firms, product differentiation, and advertising. For simplification we assume costs don't rise and we are in a constant cost industry.
If there are profits, more competition will enter the market and thus there will be more substitutes. If there are more substitutes the demand curve will become more elastic which will cause the price to fall and output to fall. The demand curve will rotate downwards which acts like a shift of the demand curve to the left. It will keep shifting until the demand is flat enough to be tangent to the ATC. Each firm will have a smaller share of the consumers than before. The demand for monop. comp. doesn't have the same determinants as a demand for the market. The determinants for monopolistic competition are entry and exit of firms, product differentiation, and advertising. For simplification we assume costs don't rise and we are in a constant cost industry.
If there are losses, more competition will exit the market and thus there will be fewer substitutes. If there are fewer substitutes the demand curve will become more inelastic which will cause the price to rise and output to rise. The demand curve will rotate upwards which act like a shift of the demand curve to the right. It will keep shifting until the demand is steep enough to be tangent to the ATC. Each firm will have a larger share of the consumers than before. The demand for monop. comp. doesn't have the same determinants as a demand for the market. The determinants for monopolistic competition are entry and exit of firms, product differentiation, and advertising. For simplification we assume costs don't rise and we are in a constant cost industry.
If there are losses, more competition will exit the market and thus there will be fewer substitutes. If there are fewer substitutes the demand curve will become more inelastic which will cause the price to rise and output to rise. The demand curve will rotate upwards which act like a shift of the demand curve to the right. It will keep shifting until the demand is steep enough to be tangent to the ATC. Each firm will have a larger share of the consumers than before. The demand for monop. comp. doesn't have the same determinants as a demand for the market. The determinants for monopolistic competition are entry and exit of firms, product differentiation, and advertising. For simplification we assume costs don't rise and we are in a constant cost industry.
Excess Capacity- What does excess capacity mean? And why is it common with monop. comp.?
Excess Capacity- What does excess capacity mean? And why is it common with monop. comp.?
Excess capacity-produce less than the output which ATC is minimized.
Demonstrate graphically how the curves change from short run to long run.
Demonstrate graphically how the curves change from short run to long run.
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