1. Monopolistic Competition

2. Monopolistic Competition (m.c.)
large number of independent sellers
no or low barriers to entry
differentiated product

3. differentiated products
products that are distinguished from similar products by such characteristics as quality, design, and location.
examples: service stations, aspirin, tissues, retail stores

4. Demand Curve for the Monopolistic Competitor’s Product
Since the product is differentiated, there is some brand loyalty and the firm has some control over price.
Since there are good substitutes available, however, the demand curve is fairly elastic.

5. The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product.
p.c m.c monopoly P P P D D D Q Q Q

6. Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.

7. Monopolistic Competitor making positive economic profits

8. Profit-maximizing output: where MR = MC$
ATC MR D Q*
quantity

9. Determine the price from the demand curve, above Q*.MC $
ATC P* MR D Q*
quantity

10. Determine the cost per unit from the ATC curve, above Q*.MC $
ATC P*
ATC* MR D Q*
quantity

11. Determine the TR = PQ box.MC $
ATC P*
ATC* MR D Q*
quantity

12. Determine the TC = ATC . Q box.MC $
ATC P*
ATC* MR D Q*
quantity

13. The difference between TR and TC is profit.MC $
ATC P*
ATC*
profit MR D Q*
quantity

14. Monopolistic Competitor with a loss

15. Profit-maximizing or loss-minimizing output: where MR = MC
ATC MC $
AVC MR D Q*
quantity

16. Determine the price from the demand curve, above Q*
ATC MC $
AVC P* MR D Q*
quantity

17. Determine the cost per unit from the ATC curve, above Q*MC $
AVC
ATC* P* MR D Q*
quantity

18. Determine the TC = ATC . Q boxMC $
AVC
ATC* P* MR D Q*
quantity

19. Determine the TR = PQ box.
ATC MC $
AVC
ATC* P* MR D Q*
quantity

20. The difference between TR and TC is profit or loss.
ATC MC $
AVC
ATC* P*
loss MR D Q*
quantity

21. Monopolistic Competitor Breaking Even (Zero Economic Profit)

22. Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC)$
ATC MR D Q*
quantity

23. Determine the price from the demand curve, above Q*MC $
ATC P* MR D Q*
quantity

24. Determine the cost per unit from the ATC curve, above Q*MC $
ATC
ATC* = P* MR D Q*
quantity

25. Determine the TR = PQ box.MC $
ATC
ATC* = P* MR D Q*
quantity

26. Determine the TC = ATC . Q box.MC $
ATC
ATC* = P* MR D Q*
quantity

27. Since TR = TC, profit is zero.MC $
ATC
ATC* = P* MR D Q*
quantity

28. Possibilities for the Monopolistic Competitor
short run: positive profits, losses, or breaking even.
long run: breaking even.

29. Similarities between perfect competition and monopolistic competition
Profits must be zero in long run equilibrium.
Firms are responsive to changes in demand conditions.
Competition in the pursuit of profit encourages resource movements that are efficient.

30. Differences between perfect competition and monopolistic competition
In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not.
For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC.
Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.