chapter 16
Competition with Differentiated Products
The Monopolistic Competitive Firm in the Short Run
The Monopolistic Competitive Firm in the Short Run
- Each firm in a monopolistic competitive environment is in many ways like a monopoly.
- The product is different from those of other firms and because of this faces a downward sloping demand curve.
Source: http://wps.prenhall.com/bp_casefair_econf_7e/30/7934/2031304.cw/index.html
The Monopolistic Competitive Firm in the Long Run
- The above diagram shows the cost, demand and marginal revenue curves for two typical firms each in a different monopolistic competitive industry.
- The profit-maximizing quantity is found at the intersection of the marginal revenue and the marginal cost curves.
- The two graphs show two different outcomes for the firm’s profit.
- In graph (a) price exceed average total cost so the firm makes a profit.
- In graph (b) price is below average total cost so the best they can do is minimize losses.
- Overall monopolies and monopolistic competitive firms are very similar in the short run.
The Monopolistic Competitive Firm in the Long Run
- When firms are making a profit this will entice new firms into entering the market. This is also helped by free entry which characterizes Monopolistic firms.
- This entry allows for more firms offering products for sale in the industry. Due to supply and demand the price received for products will fall. There will now be an increase in substitutes leading to an increase in the number of goods customers can choose from.
- When firms are making losses as in graph (b), firms in the market want to leave. As these firms exit, supply will fall and price will rise. This reduces the number of substitutes and firms now have fewer products to choose from.