Introduction to Monopolistic Competition AP Economics Mr. Bernstein Module 67: Introduction to Monopolistic Competition December 2017

AP Economics Mr. Bernstein Characteristics of Monopolistic Competition Like Perfect Competition: Many firms (too many to allow tacit collusion but fewer than Perfect Competition) No barriers to entry or exit Like Monopoly: Some ability to set pricing – faces downward sloping D But Unlike Perfect Competition or Monopoly… Products differentiated vs competition Examples Local restaurants, retail groceries or clothing stores

AP Economics Mr. Bernstein Monopolistic Competition in the Short Run D is downward sloping In Short Run, set P and Q as a Monopoly would Can earn profit in short run

AP Economics Mr. Bernstein Monopolistic Competition in the Short Run Can also earn loss in short run

AP Economics Mr. Bernstein Monopolistic Competition in the Long Run Entry and exit can occur in response to short-run profits or losses Same adjustment process as Perfect Comp. Firms will earn normal profit in the long run P*=ATC, tangent to ATC (not at minimum…)

AP Economics Mr. Bernstein Monopolistic Competition vs. Perfect Competition Normal profits in both (easy entry and exit) MR=MC in both In Perfect Comp, ATC=P=MR=MC, but in Monopolistic Comp ATC=P > MR=MC…on the downward sloping range of ATC So Monopolistic Comp in not productively efficient (P=ATC min) and output is less than in Perfect Comp. Economists call this excess capacity

AP Economics Mr. Bernstein Is Monopolistic Competition Inefficient? Since P>MC, DWL does occur Because there is some competition, the wedge between P and MC is smaller than in monopoly Differentiated products bring variety to consumers Differentiated products also bring some pricing power to producers (the price of variety?)