ECON1101 Chapter Notes - Chapter 16: Monopolistic Competition, Market Power, Marginal Revenue
Document Summary
Between monopoly and perfect competition: monopolistic competition: a market structure in which many firms sell products that are similar but not identical. Thus, rather than being a price taker, each firm faces a downward sloping demand curve: free entry: in the long run, firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero. Competition with differentiated products: the monopolistically competitive firm in the short run, monopolist competitors, like a monopoly, maximise profit by producing the quantity at which marginal revenue equals marginal cost. The firm in panel a) makes a profit because, at this quantity, price is above average total cost. This conclusion arises because profit maximisation requires marginal revenue to equal marginal cost and because the downward-sloping demand curve makes marginal revenue less than the price: as in a competitive market, price equals average total cost.
