1. Monopolistic Competition

2. Assumptions Many buyers and a “large-ish” number of sellers
Sellers are price-makers (i.e. have market power) to some extent in the short run
Differentiated products
Freedom of entry and exit

3. Short Run Equilibrium: FirmMC P q
Demand MR

4. Short Run Equilibrium: FirmMC
Output: MC = MR P
qmc q
Demand MR

5. Short Run Equilibrium: FirmMC
Price is Pmc P
Pmc
qmc q
Demand MR

6. Short Run Equilibrium: FirmMC
Note: Pmc > AC at qmc
Excess profits exist (in the short run) P AC
Pmc q
qmc
Demand MR

7. Long Run Equilibrium: FirmMC
Note: Pmc = AC at Ymc P
There are no excess economic profits in the long run
Pmc AC
qmc q
Demand MR

8. Monopolistic Competition v. Perfect Competition v. Monopoly
Homework