Narrator: What I want to do in this video is think about why it's so hard for a monopolistic competitor to make money in the long run. Just as a reminder, a
monopolistic competitor is much closer to perfect
competition then it is to a monopoly. What it means is that you have a monopoly in your differentiated product, but eventually other
people are going to make substitute products. They can't make exactly your product, it can't be identical and it might eat into your demand. To understand that, let
us draw the demand curve for a market in which
monopolistic competition is going on. I will draw it nice and big. In this axis right over
here I'm going to plot 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 an given period of time. We're going to speak
in fairly general terms over here. Now, let's assume that our
monopolistic competitor right over here is Apple and it's iPad's. (writing) Apple, iPad's. I want to emphasize, I'm
not making any 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 iPad's. They don't have a monopoly
in Tablet computers or computers in general, but only they can sell iPad's. So, let's draw the demand
curve in the short run for iPad's and I'll make it linear to make things simple. Let me draw a little bit better than that. Let's say the demand curve looks something like that. That is our demand curve
and we know that if that's the demand curve and
remember we're talking about the market for iPad's,
not the market for Tablet computers, Apple is the
monopolist in the market for iPad's, so it's
marginal revenue will have twice the slope 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 profit in a given period of time,
whatever this quantity per period of time is. Let's draw its cost,
so first I'll draw ... Let me draw its marginal cost, so its marginal cost might
look something like this. That is their marginal
cost and then to do average total cost, 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. As long as an average total cost is higher than the marginal cost
curve, that's going to be downward sloping, and at
some point they're going to be equal to each other. Now, each incremental unit that you add on is going to increase the average because each incremental
unit's cost is more than the average, so it's
going to cause everything to average up. This actually right
over here should be the minimum point on our
average total cost curve. Given the way I've drawn
things, what is Apple's short run economic profit? We just have to think
of its optimal quantity to produce. It's definitely going to produce one, so 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 all the way until this point right over here. It doesn't want to produce
more than that because the opportunity cost on
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, I'll call that Q* right over there. At that quantity this
is the price that they can charge in the market going in 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 there
average or you could view that as their average revenue per unit. Then we have our average cost per unit right over here, an average total cost. This is their average
economic profit per unit. 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. (writing) total, total,
economic, economic, economic profit. Now, in all things, if
the rest of the world sees economic profit they're just like, wow that's a good ...
people are doing better in that market than
their opportunity cost. So other competitors say
well I can't produce iPad's 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 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
and Google's Android and they're making competitive products. And on top of it they are marketing it, they are marketing it heavily. (writing)they are marketing. They are trying to market the products as aggressively as possible. 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 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, (writing) That looks something like that. This is our 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 was going to have twice the slope of that, so it's going to look something like this. If it's twice the slope it's going to hit right about ... it's going to look ... I can do a better job than that. Our new marginal revenue
... let me do it in a slightly different color,
I'll do it in pink. Our new marginal revenue curve will look something like that. This is long run marginal revenue. (writing) long run marginal revenue curve. Now what is the optimal quantity for Apple to produce? Now it's going to make economic profit, economic profit, economic
profit, all the way until this point right over here. Now we have this new,
I'll call it long run, long run quantity. Maybe I'll call it ... let me
do it in 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 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, that the price hasn't changed much. We've got the same price,
but now what is our average economic profit per unit? 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. Over here we had this nice green height and now we have no height anymore. Even though we're selling
a good number of units our average economic
profit per unit is zero. Instead of an area over there, we're going to have the area of a line, which is essentially zero. Now we have zero economic, (writing) zero economic, economic, zero economic profit. The important thing to
realize for a monopolistic competitor and this wont
happen over night ... 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. You can even have an economic loss and still have accounting profit. Some people would argue that right now Apple is still making
profits above and beyond even their opportunity
cost and this is actually a work in progress right now in 2012, that the demand curve
is shifting to the left, but eventually all of the
economic profit will be eaten up and there will be less incentive for all of these players
to be as aggressive. The important thing to realize with a monopolistic competitor is
sure, they're curves look like a monopolist, but the competition doesn't happen in terms
of supply of iPad's. None of these players can supply iPad's the competitive part happens
with all of these people producing substitutes and being aggressive about it and eating in to the monopolistic competitor's demand.