1. Monopolistic Competition

2. Monopolistic Competition
Monopolistic competition is characterized by a fairly large number of firms (i.e. 25 to 75 but not thousands such as in pure competition)
Monopolistic competition involves
Small market shares: there are many competing producers in an industry (e.g. similar to perfect competition) and consequently there is limited control over prices
Product differentiation: each producer sells a differentiated product
Easy Entry and Exit: there are few barriers to entry or exit from the industry
No collusion: the presence of a relatively large number of firms ensures collusion to restrict output and set prices is unlikely

3. Product Differentiation
Product differentiation: a strategy in which one firm’s product us distinguished from competing products
There are several ways a firm can differentiate their product
Product attributes: physical or qualitative differences in products (e.g. Personal computers differ in storage capacity, speed, etc.)
Service: consumer service and conditions surrounding the sale of the product (e.g. Helpful clerks, firm’s service reputation)
Location: the location and accessibility of stores that sell a particular product (e.g. Small convenience stores vs. super markets)
Brand names and packaging: use of brand names and trademarks, packaging.

4. Demand Curve- Monopolistic Competition
The firm faces a downward sloping demand curve because each firm offers a distinct product and has some ability to influence price
However, unlike a monopolist, a monopolistically competitive firm does face competition
The amount of its product it can sell depends on the prices and products offered by other firms in the industry
Thus, demand is highly elastic because there are many close substitutes
Monopoly
Monopolistic Competition

5. Short-run Equilibrium
A monopolistically competitive firm faces a downward-sloping marginal revenue (MR) curve and the firm’s equilibrium is where MR = MC
There are three possible situations in the short-run
If AR < AC then Profit < 0 (i.e. the firm’s profit is negative)
If AR = AC then Profit = 0 (i.e. the firm breaks even)
If AR > AC then Profit > 0 (i.e. the firm’s profit is positive)
Supernormal Profit
Normal Profit
Negative Profit

6. Long-run Equilibrium
Recall, firms can enter or exit the market in the long-run
If existing firms earn positive profits, new firms will enter the market in the long-run.
This will shift each existing firm’s demand curve to the left
Similarly, if existing firms suffer a loss, they will exit the market in the long-run
This will shift the other firm’s demand curves to the right
The long-run equilibrium occurs when AC = AR and all firms within the industry are earning normal economic profits
Neither productive nor allocative efficiency occurs in long-run equilibrium