1.  relatively small economies of scale  many firms  product differentiation  close but not perfect substitutes  product characteristics, location, services offered, product image  no artificial barriers to entry 16 Monopolistic Competition

2. Output Cost or Revenue ($) 100200300400500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Demand (each of 2 firms) Demand and Costs Demand (each of 4 firms) Demand (each of 8 firms)  As new firms enter, demand curve for each firm shifts to the left. Assuming that all firms charge the same price and share the market.

3. Output Cost or Revenue ($) 100200300400500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 MC ATC  Economies of scale reduce average total cost (ATC) for larger levels of production.

4. Output Cost or Revenue ($) 100200300400500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 MRMR Demand (2 firms) Quantity = 400 Price = $2.50 Ave. Cost = $1.38 MC ATC Market with 2 Firms 400 units $1.12 $448 profit

5. Output Cost or Revenue ($) 100200300400500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 MRMR Demand (4 firms) Quantity = 200 Price = $2.50 Ave. Cost = $1.75 MC ATC Market with 4 Firms 200 units $0.75 $150

6. Output Cost or Revenue ($) 100200300400500 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 MRMR Demand (8 firms) Quantity = 100 Price = $2.50 Ave. Cost = $2.50 MC ATC Market with 8 Firms  New firms enter as long as there are profits. Each firm has a share of the market average cost is higher

7. Output Cost or Price ($) 246810 5 15 20 25 30 35 40 Average total cost MC Monopolistic Competition vs. Perfect Competition MR Demand = Because MR = Demand … … at equilibrium MC = AC

8. Output Cost or Price ($) 246810 5 15 20 25 30 35 40 Average total cost MC MR Demand Because MR < Demand … … at equilibrium MC < AC Monopolistic Competition vs. Perfect Competition