relatively small economies of scale many firms product differentiation close but not perfect substitutes product characteristics, location, services offered, product image no artificial barriers to entry 16 Monopolistic Competition
Output Cost or Revenue ($) Demand (each of 2 firms) Demand and Costs Demand (each of 4 firms) Demand (each of 8 firms) As new firms enter, demand curve for each firm shifts to the left. Assuming that all firms charge the same price and share the market.
Output Cost or Revenue ($) MC ATC Economies of scale reduce average total cost (ATC) for larger levels of production.
Output Cost or Revenue ($) MRMR Demand (2 firms) Quantity = 400 Price = $2.50 Ave. Cost = $1.38 MC ATC Market with 2 Firms 400 units $1.12 $448 profit
Output Cost or Revenue ($) MRMR Demand (4 firms) Quantity = 200 Price = $2.50 Ave. Cost = $1.75 MC ATC Market with 4 Firms 200 units $0.75 $150
Output Cost or Revenue ($) MRMR Demand (8 firms) Quantity = 100 Price = $2.50 Ave. Cost = $2.50 MC ATC Market with 8 Firms New firms enter as long as there are profits. Each firm has a share of the market average cost is higher
Output Cost or Price ($) Average total cost MC Monopolistic Competition vs. Perfect Competition MR Demand = Because MR = Demand … … at equilibrium MC = AC
Output Cost or Price ($) Average total cost MC MR Demand Because MR < Demand … … at equilibrium MC < AC Monopolistic Competition vs. Perfect Competition