1. AP Microeconomics Warm Up: Why will it be hard for a monopolistic competition firm to sustain profits?

2. Similarities to Perfect Competition Entry and exit to the industry in monopolistic competition are free from barriers. Why? Firms enter and compete when there are profits to be made and exit when suffering losses. Products are similar and there are so many competitors that one more can enter

3. Similarities to Perfect Competition If profiting, new businesses will enter shifting demand left and moving firms to long run equilibrium Perfect Competition: When economics of scale can be realized, firms have an incentive to expand. Thus firms will be pushed to competition to produce at their optimal scales. Prices will be drive to the minimum points on the LRAC curve. Let’s Graph it!!

4. Similarities to Perfect Competition  Monopolistic Competition: As new firms enter a monopolistically competitive industry in search of profits, the demand curves of profit-making existing firms begin to shift to the left, pushing marginal revenues with them as consumers switch to the new close substitutes. The process continues until profits are eliminated, which occurs for a firm when its demand curve is just tangent to is average cost curve Let’s Graph It!!!

5. But: … (1) Profit maximizing strategy is to hold down production and charge a price above marginal cost (P > MC). Each firm has its own monopoly. Only Kellogg’s can produce Corn Flakes, but any firm can produce a nearly identical substitute. (Price is the value that society places on a good and marginal cost is the value that society places on the resources needed to produce that good)

6. Monopolistic Characteristics (2)The final equilibrium in a monopolistically competitive firm is necessarily to the left of the low point on its average total cost curve; these firms will not realize all the economies of scale available.

7. Monopolistic Characteristics Most industries that comfortably fit the model of monopolistic competition are very competitive. Price competition coexists with product competition, and firms do not earn incredible profits and do not violate any of the antitrust laws.

8. Monopolistic Characteristics Monopolistically competitive firms have not been a subject of great concern among economic policy makers. Their choices are controlled by the forces of the market and there is no real need for regulations or controls on them.