Lecture Notes: Monopolistic Competition

Introduction to Monopolistic Competition

• Monopolistic competition combines elements of both monopoly and competition.
• Characteristics:
  • Price makers: firms can set their own prices.
  • Demand does not equal marginal revenue.
  • Low barriers to entry, similar to perfect competition.
  • No economic profit in the long run.
  • Differentiated products: not identical, close substitutes.
  • Downward sloping demand curve (like monopoly), not horizontal.

Short Run Dynamics

• Firms can make a profit in the short run.
• Profit in Short Run:
  • Total Revenue vs. Total Cost shows profit margins.
  • Graph looks like a monopoly graph.

Transition from Short Run to Long Run

• Entry of New Firms:
  • Occurs when existing firms make profit.
  • Increases substitutes available in the market.
  • Leads to a decrease in demand for existing firms, shifting demand curve left.

Long Run Equilibrium

• Characteristics:
  • No economic profit due to increased competition.
  • Demand curve shifts left, intersecting with ATC at the point where MR = MC.

Graphical Representation

• Be able to draw and interpret graphs of:
  • Short run profit scenario in monopolistic competition.
  • Long run equilibrium with no economic profit.

Additional Resources

• Check the playlist for the unit covering key concepts and graphs.
• Consider using the VEI P-Test review app for further study.

Conclusion

• Understanding the process and implications of new firms entering the market is crucial.
• Practice drawing graphs to visualize changes from short run to long run.

Follow-Up:

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