1. Monopolistic Competition

2. Under monopolistic competition… large number of small firms
Monopolistic competition: a common market structure in which firms have many competitors, but each one sells a slightly different product.
Under monopolistic competition…
large number of small firms
each firm can ignore the consequences of its actions on the other firms in the market.
produce similar but slightly different products.
produce heterogeneous (differentiated) products.

3. Product differentiation
Product differentiation: the act of making a product that is slightly different to the product of a competing firm.
Homogeneous or heterogeneous – consumers decide!

4. Techniques of product differentiation include

5. Point of Product Differentiation?
Greater real or perceived differentiation, the less price elastic demand becomes.

6. Examples Each firm a mini-monopoly.
But, monopolistically competitive firms compete
New firms free to enter the market.

7. Difference Between Monopoly and Monopolistic Competition
Monopoly Entry completely blocked
Monopolistic Competition Free entry into market

8. Difference Between Perfect and Monopolistic Competition
Perfect Competition
Homogenous products
Horizontal demand curve
Monopolistic Competition
Differentiated products
Downward facing demand curve

9. The short run equilibrium of the firm under monopolistic competition
MR intersects halfway between the price axis & demand (AR)
The short run equilibrium of the firm under monopolistic competition
Downward-sloping D = AR
PED > monopoly
Profit is maximised where MR = MC
P1; Q1
Economic profit per unit = AR - AC at Q1.

10. The long run equilibrium of the firm under monopolistic competition
MR = MC & AR = AC.
AR curve tangent to AC curve.
Demand falls (substitutes).
D & MR shift left.
Economic profits eliminated
No further entry into the industry.
D becomes more price elastic
(more close substitutes)