Monopolistic Competition

Short Run in Monopolistic Competition

Firms can earn economic profit if price is greater than average total cost (ATC).

Losses in Short Run

Firms incur losses when price is less than average total cost (ATC).

Long Run Effect of Profit in Monopolistic Competition

If firms earn economic profit, new firms enter the market leading to decreased demand for existing firms' products.

Long Run Effect of Losses in Monopolistic Competition

If firms make losses, some firms exit the market, increasing demand for remaining firms.

Long Run Equilibrium in Monopolistic Competition

Firms make zero economic profit in the long run, where price equals average total cost (ATC).

Normal Profit

Profit sufficient to keep a firm in business, not necessarily leading to economic profit.

Key Characteristics of Monopolistic Competition

Firms have some pricing power, a downward sloping demand curve, and products are close substitutes.

Examples of Monopolistic Competition

Industries like restaurants, clothing brands, and salons.

Graph Features of Monopolistic Competition

Price is above marginal cost (p > mc) and firms do not produce at minimum average total cost, resulting in excess capacity.