Monopolistic Competition

History of Monopolistic Competition

- Revered as imperfect competition

- First identified by Edward Chamberlin and Joan Robinson

The theory of monopolistic competition is built on three assumptions:

1. There are many sellers and buyers.

2. Each firm (in the industry) produces and sells a slightly differentiated product.
3. Entry and exit are easy.

I. The Monopolistic Competitors Demand Curve

a. Perfectly Competitive Firm
- Has many rivals and products has endless number of substitutes
- Elasticity of demand for product: HIGH
- Demand curve: faces horizontal
b. Monopolistic Firm
- Has no rivals and produces goods with no substitutes
- Elasticity of demand for product: LOW
- Demand curve: downward sloping demand curve
c. Monopolistic Competitive Firm
- Has many rivals but does not sell homogenous goods
- Products have substitutes but not perfect ones
- Elasticity of demand for product: not as great as in the perfectly competitive
firm
- Demand curve: not horizontal but downward sloping
II. The Relationship Between Price and Marginal Revenue for a Monopolistic
Competitor
Due to a downward-sloping demand curve, monopolistic competitor has to lower
price to sell an additional unit of good it produces. Hence, P>MC.
III. Output, Price, and Marginal Cost for the Monopolistic Competitor
Monopolistic competitor produces the quantity of an output at which MR=MC. It
must produce a level of output at which price is greater than the marginal cost.
IV. Will there be profits in the long run?
ABRENILLA NA BAHALA ANI, KAPOY NAKO. MWA
V. Excess Capacity: What is it, and is it good or bad
Excess Capacity Theorem: A monopolistic competitor will produce an output
smaller than the one that would minimize its unit costs of production.
Wala ko kasabot sa graphs, kind of. Pero slight lang. Kamo na bahala diri.
VI. The Monopolistic Competitor and Two types of Efficiency
 - Monopolistic competition is not resource allocative efficient since P>MC and
not P=MC.
- Monopolistic competition is not productive efficient since it operates at
excess capacity and does not charge a price that is equal to its lowest ATC.
VII. Advantages of Monopolistic Competition
Read powerpoint and/or research more, expound gamay gamay dako
VIII. Disadvantages of Monopolistic Competition
Read powerpoint and/or research more, expound gamay gamay dako
IX. Perfect Competition vs Monopolistic Competition
Read powerpoint and/or research more, expound gamay gamay dako
X. VIDEO