Ch.17+Monopolistic+Competition

Monopolistic Competition
[|*monopolistic competition]

This is another type of market that is in between monopoly and perfect competition. This one, however, looks very similar to monopoly. The graph is actually identical to the monopoly graph with a few differences from the behavior.

Long Run
Just like monopoly or any other market, monopolistically competitive firms produce where MC = MR. This creates either profit or loss, that is, in the short run. As soon as it enters the long run, things change. If the firm were earning profit, more firms would ENTER because free entry is possible. If the firm were losing profit, firms would EXIT. These would be shown by the movement of the demand curve. When more firms enter, the firm originally selling the product would have less demand from the people because they might have changed their taste of the product. When the firms exit, the firm would have more customers shifting demands to their product, increasing the profit. Eventually, in the long run, a monopolistically competitive firm has zero profit. The exact point where this would be is where the demand curve and the ATC curve meet at one point.

Profit = (Price - ATC) * Quantity

Price and ATC would be the same. Thus, there would be no profit at all.

Advertisement
Since monopolistically competitive firms need to compete, they use advertisement as a vital weapon to sell their products.

Some people agree with this method. Others don't.

media type="youtube" key="Xlpo4F6MdbM" width="425" height="350" [|*Monopolistic Competition]

monopolistic competition**: market with many sllers but with products that are similar, not identical
 * __Key Concepts__

Questions 1. Which market is the most similar looking to this market, concerning the graphs? 2. Why does monoplistic competition have no profit in the long run?

Answers 1. monopoly 2. Because of free entry