1. Monopolistic Competition
Chapter 17

2. Characteristics Monopolistic Competition Many Sellers
Differentiated Products [not identical, but similar]
Relatively Easy to enter or leave industry
Reasonably complete information
Some price control

3. 4 Market Structures Number of Firms? One firm Few firms Many firms
Type of Products?
Differentiated
products
Identical
products •
Shoes
Restaurants
Monopolistic
Competition
Perfect •
Wheat
Competition •
Tap water
Electricity
Monopoly •
Soft Drinks
Automobiles
Oligopoly

4. Monopolistic Competition
Firms produces a product that is slightly differentiated
Firms face a downward-sloping demand curve
therefore, P > MR
Short Run: Economic Profit will exist
Long Run: Easy entry/exit ensures profit will = ZERO

5. Monopolistic Competition Profit in Short Run
Price MC
Firm makes profit
in SHORT RUN
ATC
Demand MR
Profit-
maximizing
quantity
Price
Average
total cost
Quantity

6. Short Run Profit Affect
Short-run economic profits encourage new firms to enter the market
New firms entering leads to:
1) Demand Curve shifts left
2) Profit Declines
3) Entry stops when profits = 0

7. Monopolistic Competitor in Long Run
Remember:
New entry shifted
The demand curve left
Price MC
ATC
Demand
The demand curve is now tangent to the ATC curve MR
Profit-maximizing
quantity P =
ATC
And this tangency lies vertically above the intersection of MR and MC
Quantity

8. Monopolistic Competition vs. Perfect Competition
LONG RUN EQUILIBRIUM
Monopolistically Competitive Firm
Perfectly Competitive Firm
Price
Price MC
ATC MC
ATC
Demand MR P
Quantity
produced
Efficient
Scale P = MC MR
(demand
curve)
Quantity produced =
Efficient scale
Quantity
Quantity
-any production below efficient scale

9. Perfect Competition vs. Monopolistic Competition
Profit in short run, zero L.R.
Many Firms
Excess capacity in long run
Production above minimum of ATC
No production efficiency
Price > MC
Some deadweight Loss
Incentive to advertise
PERFECT COMPETITION:
Profit in short run, zero L.R.
Many Firms
No excess capacity in long run
Production at minimum of ATC
Production efficiency
Price = MC (allocatively efficient)
No deadweight Loss
No incentive to advertise
Advertising will affect demand