Monopolistic Competition Flashcards
What are the characteristics of monopolistic competition
Large number of small firms
Product differentiation exists
Very low barriers to entry
How does this type of market operate
Price makers —> in short run due to product differentiation —> firms are monopolists of their own brand
Abnormal profits made in the short run
Low barriers to entry erode these profits
What is the situation in the short run of this market
Firm introduces new product
Firm is monopoly provider of the product —> downward sloping demand curve
Gives the firm control over price and allows firm to make supernormal profit
Profits attract new firms to the market and produce their own versions
Demand will fall for original firm —> MR and AR curve shifts left
What is the long run situation in this type of market
Normal profit is made AC curve is tangential to AR curve
