monopolistic competition

My version has pictures

monopolistic competition

The assumptions of monopolistic competition	Fairly large number of firms The firms are small relative to the industry All produce slightly different products No barriers to entry
Possible short run profit and loss	abnormal profit mc ac D=AR mr
The long equilibrium	All firms will go back to a long run equilibrium and all make normal profits If firms are making short run abnormal profit other firms will get attracted to join and the curve will shift back to normal. if there is short run losses companies will leave and the firms remaining will go to equilibrium product differentiation in order to attract more customers maximizing profits when MC=MR all firms making normal profits
Productive and allocative effeciency	Productive effiveincy- Mc=ac Allocative= mc=ar
Monopolistic competition vs. perfect competition	not productive or allocative effecient this is due to the consumers desire for different products they pay higher for the choices

Mastering Monopolistic Competition

1. Explain the assumptions of monopolistic competition.

Assumption Explanation

Number of firms	There are a large number
Size	The firms are small in comparison to the industry
Products	All products are slightly different
Barriers to entry	Very little

2. Define and give examples of product differentiation.

Differentiation exists when a good or service is perceived to be different from other goods/services in some way.

color of the packaging.

3. Explain and illustrate the demand curve for firms in monopolistic competition.

4. Explain and illustrate the short run profit/loss situation for firms in monopolistic competition.

5. Explain and illustrate the long-run equilibrium in monopolistic competition.

All firms will go back to a long run equilibrium and all make normal profits

If firms are making short run abnormal profit other firms will get attracted to join and the curve will shift back to normal. if there is short run losses companies will leave and the firms remaining will go to equilibrium

product differentiation in order to attract more customers

6. Explain the movement from short run to long run in monopolistic competition.

• Because of ease of exit and entry (no barriers to entry) SR losses or profits will turn into LR normal profits as firms enter and exit the industry freely.

• If firms are making SR abnormal profits, then other firms will be attracted to the industry.

• As they enter, they will take some business away from existing firms, whose demand curves will shift left.

• If firms are making SR losses, some firms will exit the industry. The firms that remain will find their demand curve begin to shift right as they pick up trade from exiting firms.

7. Explain and illustrate productive and allocative efficiency in the short and long run in monopolistic competition.

8. Compare and contrast perfect and monopolistic competition.

not productive or allocative effecient

this is due to the consumers desire for different products

they pay higher for the choices