Monopolistic Competition Ch 16

Monopolistic Competition

A market structure where producers have some control over prices due to product differentiation, leading to a scenario where firms face a downward sloping demand curve.

Monopolistic Competition in Short Run

In the short run, a monopolistically competitive firm will produce where MC=MR and behave like a monopolist.

Monopolistic Competition in Long Run

In the long run, firms in monopolistic competition can enter or exit the market, leading to zero economic profits as firms adjust to the price equal to average total cost.

excess capacity

a situation where firms operate below their maximum efficiency, resulting in less output than a perfectly competitive market would produce.

monopolistic competition price vs marginal cost

P>MC

product variety externality

the introduction of a new product can add to consumer’s choices, so entry of a new firm is a positive externality for consumers.

business stealing externality

firms lose customers and profits from the entry of a new competitor so entry of a new firm is a negative externality for firms.

Short Run Monopolistic Competition (profit)

Long Run Monopolistic Competition