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CAS EC 101 (177)
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Chapter 16

Chapter 16 Monopolistic Competition

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Boston University
CAS EC 101
Todd Idson

Chapter 16: Monopolistic Competition Friday, December 6, 2013 11:07 AM I. Between Monopolyand Perfect Competition • Imperfect competition: Between perfect and monopoly ○ Oligopoly and Monopolisticcompetition • Perfect competition,monopolisticcompetition and monopoly all maximize profits at MR=MC ○ Monopolisticcompetition and monopoly are not price takers and P > MC ○ Monopolisticcompetition allows entry in the long run but cannot earn economic profit • Oligopoly: Market structure in which only a few sellers offer similar or identical products ○ Concentration ratios determine an oligopolistic market • Monopolistic competition: Market structure in which many firms sell products that are similar but not identical ○ Many sellers: Firms competing for the same group of buyers ○ Product differentiation:Each product is slightly different  Makes firms not a price taker with a downward sloping demand curve ○ Free entry and exit: No market barriers  Zero economic profit in the long run II. Competition with DifferentiatedProducts A. The MonopolisticallyCompetitive Firm in the Short Run • Each firm follows monopolist’srule: produce where marginal revenue equals marginal cost ○ Profit: Price > ATC ○ Loss: Price < ATC B. The Long-Run Equilibrium • Firms making profits encourages other firms to enter the market, which shifts the demand curve to the left because there are more options • The exit and enter occurs until the economic profit decreases and equals zero ○ Zero economic profit: Demand curve is tangent to ATC and MR=MC • Monopolisticmarket: Price exceeds marginal cost because price maximization occurs when marginal revenue equals marginal cost and the downward sloping curve makes marginal revenue less than the price • Competitive market: Price equals average total cost because free entry and exit drive economic pro
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