Hey, how you doing Econ students? This is Mr. Clifford. Welcome to ACDC Econ. Right now we're going to talk about monopolistic competition. Like the name suggests, monopolist competition is kind of like a monopoly, but it's also kind of like competition.
So like a monopoly, these firms are price makers. They can charge any price they want and the demand doesn't equal the marginal revenue. But like perfect competition, it's easy for other firms to enter because there's low barriers. So they're going to make no economic profit in the long run. But another thing that makes it completely different than perfect competition is the product.
They are not identical. They're differentiated. These businesses do have products that are actually very close substitutes.
But because they're not identical, they have some control over the price. So that means it's not a price taker. And the demand is not horizontal.
It's actually downward sloping, just like a monopoly. This shows a monopolistically competitive firm in the short run. Now, how do I know it's a short run?
Well, because they're making profit. Right here is the total revenue. There's the total cost. And so right there is the profit.
Notice in the short run, it's exactly the same as a monopoly graph in every single way. But eventually, other firms are going to see them making profit. They're going to enter the industry. And that's going to end up with a graph that looks just like this. The only thing that's different is the ATC hits the demand curve right there at the quantity where MR equals MC.
This means they're making no economic profit. The total revenue is right there. The total cost is right there.
So no economic profit in the long run. All right, let's back up and figure out how do we go from short run to long run. So we've got this graph. Here's a monopolist and competitive firm making profit.
What's going to happen in the long run? Other firms are going to enter. That's not going to shift the ATC. What's going to happen is other firms enter.
That means now these firms have more substitutes. So their demand is going to fall. When the demand decreases, it's going to shift to the left and it's going to cause this firm to be in the long run. So make sure you can draw that graph on your test and you understand the process by which firms entering will cause the demand to fall. It'll be in the long run equilibrium where there's no economic profit.
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Alright, until next time!