Monopolistic Competition Chapter 17 Pages

4 Market Structures Tap water Electricity Monopoly P > MC Hair Salons Restaurants Coffee Shops Monopolistic Competition P > MC Wireless Automobiles Airlines Oligopoly P > MC Number of Firms Perfect Wheat market: ( closest to theory) Competition P = MC Type of Products Identical products Differentiated products One Firm Few Firms Many Firms

Monopolistic Competition Market Characteristics: Many Sellers Differentiated Products [not identical, but similar] Relatively Easy to enter/exit industry (most important characteristic!) Reasonably complete information Some price control Most common market structure in USA: coffee shops, restaurants, hair salon, auto repair, etc…

Monopolistic Competition Firms produces a product that is slightly differentiated Firms face a downward-sloping demand curve –therefore, P > MR Short Run: Economic Profit or Loss can exist Long Run: economic profit must = ZERO –Due to easy entry/exit & large number of firms

Monopolistic Competition Short Run Equilibrium Quantity 0 Price Q P D MR ATC MC Firm can earn profit in SHORT RUN E1E1

Short Run Profit Will Not Last Profit encourages new firms to enter the market New firms entering leads to: 1)Demand Curve shifts left –As your firm sells less! 2) Profit Declines 3) Entry stops when profit = zero

Monopolistic Competition Long Run Equilibrium Quantity Price 0 D MR ATC MC Profit-maximizing quantity P =ATC The demand curve is now tangent to the ATC curve And this tangency lies vertically above the intersection of MR and MC Economic Profit = ZERO Remember: New entry shifted The demand curve left

Worksheet Monopolistic Competition

Long Run Equilibrium Quantity 0 Price Demand Monopolistically Competitive Firm Qty 0 Price P D=MR Perfectly Competitive Firm MC ATC MC ATC MR Efficient Scale P Q Q = Efficient scale - Gap between efficient scale production & qty produced