1. KRUGMAN'S MICROECONOMICS for AP* Introduction to Monopolistic Competition Margaret Ray and David Anderson Micro: Econ: 31 67 Module

2. What you will learn in this Module : How prices and profits are determined in monopolistic competition, both in the short run and in the long run. How monopolistic competition can lead to inefficiency and excess capacity.

3. Monopolistic Competition Characteristics in common with perfect comp.: Many firms exist in the market, but not as many as perfect competition. There are no barriers to entry or exit. Characteristics in common with monopoly: The product is differentiated. Each firm has some ability to set the price of their product.

4. Monopolistic Competition in the Short Run In the short run, monopolistic competitors set price and quantity in the same way a monopoly does. Monopolistic competitors can earn a profit in the short run.

5. Monopolistic Competition in the Short Run Monopolistic competitors can also earn a loss in the short run. ATC

6. Monopolistic competition in the Long Run Entry and exit occur in response to short-run profits or losses In the long run, Monopolistic competitors earn a normal profit

7. Comparing Monopolistic Competition with Perfect Competition Economic profit = 0 (normal profit), so ATC=P in both due to entry and exit MR = MC in both (profit maximization rule) In perfect competition, ATC = P = MR = MC In monopolistic competition ATC = P > MR = MC Perfect competition achieves productive efficiency by producing at the minimum ATC Monopolistic competition results in excess capacity

8. Is Monopolistic Competition Inefficient? Yes, P > MC so there is DWL (deadweight loss) BUT, variety (differentiated products) provides a benefit to consumers.

9. Figure 67.1 The Monopolistically Competitive Firm in the Short Run Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

10. Figure 67.2 Entry and Exit Shift Existing Firms’ Demand Curves and Marginal Revenue Curves Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

11. Figure 67.3 The Long-Run Zero-Profit Equilibrium Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

12. Figure 67.4 Comparing Long-Run Equilibrium in Perfect Competition and Monopolistic Competition Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers