Lecture Notes: Monopolistic Competition in Economics

Introduction

Definition: A market structure that blends elements of monopoly and perfect competition.
Characteristics:
- Firms are price makers: Can charge any price, demand ≠ marginal revenue.
- Low barriers to entry: Easy for other firms to enter the market.
- No economic profit in the long run due to competition.
- Differentiated products: Unlike perfect competition, products are not identical.
- Firms have some control over pricing due to product differentiation.

Monopoly: Similar in price setting and demand curve (downward sloping).
Perfect Competition: Similar in terms of low barriers and long-run no economic profit.

Firms can make a profit in the short run.
Graph Characteristics:
- Profit is shown where total revenue exceeds total cost.
- Graph resembles that of a monopoly.

Other firms enter the market seeing profit opportunities.
Entry of new firms leads to more substitutes for products.
Demand curve shifts left: Decrease in demand for the original firm.
Graph Characteristics:
- ATC (Average Total Cost) intersects demand curve.
- Firms make no economic profit (total revenue = total cost).

Process:
- New firms enter the market.
- Increased competition leads to demand decrease for existing firms.
- Results in long run equilibrium with no economic profit.

Be prepared to draw and interpret graphs showing short run and long run scenarios.
Understand the process of market entry and its impact on demand shifts.

Make sure to practice drawing graphs and understanding the concepts to be well-prepared for tests.
Engage with online resources for comprehensive understanding.

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