Monopolistic Competition/Imperfect Competition
In monopolistic competition:
- Many sellers
- Each firm’s product is slightly different from another’s.
o Each firm has a downward sloping demand curve (like in monopoly)
- Free entry and exit
- Firms are somewhat price setters
o Example: Restaurants, most retailers.
MAXIMIZES PROFITS WHERE MARGINAL COST = MARGINAL REVENUE
In the short run, a monopolistically competitive firm behaves just like a monopolist
Monopolistic Competition Profits: Monopolistic Competition Losses
Short Run Entry
Economic profits encourage new firms to enter the market.
- Firms already in the market face decreased demand (demand curve shifted left)
- Profits for other firms decline Short Run Exit
- Increases demand faced by remaining firms (Demand shifts to right)
- Increases remaining firms’ profits
Firms make zero economic profits when Price = Average Total Cost
Long Run Equilibrium
Two Characteristics of Monopolistic Competition
- Price always exceeds marginal cost (profit maximization requires MR = MC)
o Downward sloping demand