1. Monopolistic Competition A market with many buyers and sellers, with low barriers to entry and differentiated products Each seller creates a certain uniqueness and brand loyalty within a largely competitive market Each seller can charge a slightly different price (Perfect competition assumes homogeneity of products. Monopolistic Competition is a more likely model under which most business operate, particularly manufactured goods.)

2. Monopolistic Competition – The Curves in the Long Run! Price £ Quantity AC MC AR = D MR Q profit max P profit max Profit maximising output is where MC = MR Price for this output is set by the demand / AR curve This diagram shows no abnormal profit since AC = P

3. Short Run Long Run Price £ Quantity AC MC AR = D MR Q profit max P profit max AC Price £ Quantity AC MC AR = D MR Q profit max P In the short run, firms may make a loss (AC > AR) so firms will leave the industry. This reduces the advertising costs (AC) and increases the market size (AR) of existing firms to return to normal profits

4. Short Run Long Run Price £ Quantity AC MC AR = D MR Q profit max P profit max AC Price £ Quantity AC MC AR = D MR Q profit max P In the short run, firms are may make supernormal profits (AC < AR) so new firms will enter the industry. This increases advertising costs (AC) and decreases market size (AR) of existing firms to return to normal profits.

5. Monopolistic Competition Efficiency Allocative Efficiency  Since P ≠ MC; (P>MC) Productive Efficiency  Q is not at min AC.

6. Evaluating the Monopolistic Competition Model Model assumes freedom of entry/exit – the extent of this may differ by industry New products may mimic some existing products more than others – so some firms may be squeezed out while others maintain super-normal profits