 relatively small economies of scale  many firms  product differentiation  close but not perfect substitutes  product characteristics, location, services.

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 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