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Monopolistic Competition

Monopolistic Competition. Characteristics. Small firms (size) Fewer numbers than in PC No collusion (cooperation) between firms Independent actions Differentiated Product Some control over price Easy to enter or exit the market Advertising

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Monopolistic Competition

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  1. Monopolistic Competition

  2. Characteristics • Small firms (size) • Fewer numbers than in PC • No collusion (cooperation) between firms • Independent actions • Differentiated Product • Some control over price • Easy to enter or exit the market • Advertising • Emphasize non-price differences (product differences)

  3. Demand Curve • Highly (but not perfectly) elastic • More elastic than monopoly but less elastic than perfect competition • Less competition • Products are not perfect substitutes P D (Monopoly) D (perfect competition) D (monopolistic competition) Q

  4. Short Run Profit Maximization • Economic profit is achieved if P>ATC minimum P MC Profit max P is set here ATC PMC Profit ATCmin Profit max Q is set here D QMC Q MR

  5. Long Run Adjustment • If economic profit is earned, new firms will enter the industry • More competition so some consumers will go to other sellers • Demand curve shifts left, lowers price and wipes out economic profit • In LR firms will only earn normal profit

  6. MC firms are not productive or allocatively efficient • Excess Capacity • Don’t produce at efficient amount • Some resources left underused • Gap between Q of MC=MR and Q of ATCmin is the lost capacity

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