EC120 Lecture 12: EC120- Chapter 16 Monopolistic Competition
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Many sellers: many firms competing for the same group of customers. Product differentiation: slightly different products, rather than being price takers each firm has a downward-slopping demand curve. Free entry and exit: no restriction, the number of firms in the market adjusts until the economic profit is zero: ex. Books, dvd"s, computer games, restaurants, piano lessons, cookies, clothing: number of firms, one -> monopoly ex. tap water, few -> oligopoly ex. tennis balls, cigarettes, many: Identical products -> perfect competition ex. wheat, milk. Competition with differentiated products: monopolistically competitive firm in the short run, downward sloping demand curve, monopolists rule for profit maximization. Mr = mc for quantity, up to the demand curve for price. P atc, by q for profit square: long run equilibrium, firms enter and exit until economic profit is 0, atc is tangent to the demand curve above (but lined up with) mr = mc.