What is Monopolistic Competition?

Monopolistic Competition

• Novels
• Movies

Differences Between Perfect Competition and Monopolistic Competition

1. In perfect competition every firm is a price taker and in monopolistic competition are not price takers. Example: gas stations have to charge the same price, but not every novel is the same price.
2. In perfect competition the firms make the same product and in monopolistic competition the firms sell differentiated products. Example: gas at one station is the same as the gas at the other station, but every novel is different.
3. In perfect competition each firm faces a horizontal (perfectly elastic) demand and in monopolistic competition each firm faces a downward sloping demand.
4. In perfect competition there is no excess capacity and in monopolistic competition there is excess capacity. Excess Capacity - When a firm is not operating at the minimum point of its ATC curve.

• In the diagram above the minimum point of ATC occurs at

  100

  ---

  units of output but the demand only touches the ATC at

  90

  ---

  units.
• The excess capacity is

  100 - 90 = 10

  ---

  units.

Similarities Between Perfect Competition and Monopolistic Competition

• If Price > ATC (economic profits) in both industries firms will

  enter

  ---

  the industry.
• This will cause price to

  decrease

  ---

  until

  Price = ATC

  ---

• In the long run every firm is making

  0

  ---

  profit because there is

  free entry/exit (no barriers to entry)

  ---

  in perfect competition and monopolistic competition.

Example: Monopolistic Competition