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Monopolistic Competition Part 3 Excess Capacity and Efficiency - YouTube
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- Okay now, let me go ahead
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and talk about what's
sometimes called the issue
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of excess capacity
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and efficiency
in monopolistic competition.
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So I'm going to revert back
to a more normal
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looking set of cost curves
for this part.
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And so we're going to go ahead
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and have a U shaped average
and total cost curve,
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and we're going
to have a marginal cost curve
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that looks like this.
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And remember,
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the marginal cost curve crosses
the average total cost curve
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at the minimum of
the average total cost curve.
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And it doesn't quite
look like that in my version,
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so I'll draw it just
a little bit differently here.
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And we know that in the long
run equilibrium,
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we're going
to have the demand curve
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just touching the average
total cost curve,
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so that this firm is charging a
price equal average total cost,
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so it's just breaking even.
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And the marginal revenue curve
would be down here.
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And this firm is producing
that amount.
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And pretend
that these all line up here
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and I didn't
have to curve that line.
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So what we can see here is,
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here's the actual quantity
this firm's producing,
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and here, below the minimum
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of the average total
cost curve is the quantity
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that would cause this firm to
minimize the cost or production.
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Or put differently,
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this is the most efficient scale
for this firm to operate,
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and so this firm has excess
capacity.
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It has the capacity
to serve this amount,
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this quantity efficiently,
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but in fact, it's only
producing this amount.
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And from a certain
point of view,
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there's deadweight loss
in this example,
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because there are units,
say right here,
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where someone was willing
to pay that much for it.
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It only had a marginal cost
of that much,
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and so that gain
from trade didn't happen.
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So some people talk
about the dead weight loss
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due to this excess capacity,
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is that shaded region
right there,
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above the marginal cost curve,
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and below the demand curve.
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Just like the dead weight loss
from monopoly.
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So the question
often comes up then,
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is monopolistic
competition inefficient?
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And this sort of,
I think,
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gets into a contrast
between a totally ideal world
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and a more realistic world.
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I think you
to realize of course,
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that we're not having anyone
make any economic profits.
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Effectively, the entry
of new firms serves
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as a kind of
automatic regulation
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of these firms monopoly power.
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Because remember the best
we can do, probably,
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with a true monopolist,
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is to try and get them to charge
price equals average total cost,
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so that they're not,
you know,
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charging a huge markup and so on
and so forth, out there.
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You know, theoretically,
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perhaps we could make ourselves
better off by having
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some of these monopolistically
competitive firms merge
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and then putting them
under price regulation.
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That would allow us to get rid
of the excess capacity problem,
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but not have these firms
charging a huge markup.
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But if you sort of think
about what that would look like,
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suppose you think
about a medium size town,
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and there's maybe
like 20 restaurants.
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And of course those restaurants
add value through their variety.
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If we force them to merge down
to ten restaurants instead,
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you know, we would have a much
smaller amount of variety,
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and that variety,
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we can't show it easily
in this kind of diagram,
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but it definitely has
significant value.
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So I, myself, don't tend
to worry about this issue
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of excess capacity
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and any potential dead
weight loss there.
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One thing that's
worth noticing is,
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a perfectly competitive firm,
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is not willing to pay anything
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to sell more
at its current price.
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Because a perfectly competitive
firm can already sell
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as much as it wants
at the current market price.
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So a perfectly competitive firm
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typically does not
engage in advertisement.
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Monopoly firms also don't
engage in advertisement.
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They would like to be able
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to sell more
at their current price,
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and not have to cut price
to sell more,
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but it's very difficult
to actually increase sales
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if you already have 100%
of the market.
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But for a monopolistically
competitive firm,
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there definitely
is a significant benefit
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to making more sales
at your current price,
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because essentially
your incremental profit
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per unit is equal to this gap
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between the price you charge
and your current marginal cost.
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So, monopolistically
competitive firms
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actually do engage in a lot of
advertising and other marketing,
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and this is in contrast again,
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to something like a perfectly
competitive firm,
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or a monopoly firm.
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