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.