Monopolistic Competition

Characteristics

*Monopolistic firms have the same diagram as the monopoly, but in nature it’s monopoly power is way lower than a monopoly’s monopoly power.

Demand and Revenue curve

Monopolistic firms have a relatively price inelastic demand curve to the demand curve for perfect competition, but a relatively price elastic demand curve comparing to the demand curve of an actually monopoly

Price and Non-price competition

Profit maximization in the short run

Short run economic profit made by a monopolistic firm

At the profit maximizing level of output, where MC = MR, the firm is producing at the output level with price Pe and quantity Qmax. At this level of output, the firm is making a profit of Pe * (a-b)

Short run economic loss made by a monopolistic firm

At the loss minimizing level of output, where MC = MR, the firm is producing at the output level with price Pe and quantity Qmin. At this level of output, the firm is making a loss of Pe * (c-d)

Normal Profit in the long run

In the long run, since all resources are variable, firms in the monopolistic competition will always earn a normal profit

Profitable Industry

In the long-run, a profitable industry will attract new entrants. As new firms enter, they will attract customers away from the existing firms, separating their market share. This will cause the demand to shift leftward uniti it reaches a point where the demand curve is tangent to the ATC curve (normal profit).

Unprofitable industry

In the long-run, a loss-making industry will cause firms to shut-down and leave. As the firms leave, the demand and the market share for other existing firms will increase. This will cause the demand to shift rightward until it reaches a point where the demand curve is tangent to the ATC curve (normal profit).

Inefficiency