Monopolistic Competition

Activity 3-12-1
Lesson 12 Objectives
 Define and discuss the nature of
monopolistic competition.
 Compare the four conditions that define
monopolistic competition with those of
perfect competition.
 When given cost and price data,
determine the output and price charged
by a monopolistic competitor in the
short-run and long-run.
Lesson 12 objectives.
 Explain why and how the long run equilibrium of a firm
under monopolistic competition differs from that of a
firm under perfect competition.
 Explain why firms under M.C. earn zero economic
profit in the long run even though they face a
downward sloping demand curve.
 Identify the wastes of monopolistic competition and
explain why product differentiation may off set these
wastes.
 Explain why monopolistic competitors are said to have
excess capacity.
 Describe the Excess Capacity Theorem.
Price/Output
Determination in the Short Run
 In the short-run, a
monopolistically
competitive firm will
produce up to the point
where MR = MC.

• This firm is earning

positive profits in the
short-run.
Price/Output
Determination in the Short Run
 Profits are not
guaranteed. A
firm with a similar
cost structure is
shown facing a
weaker demand
and suffering
short-run losses.
Price/Output
Determination in the Long Run
 As new firms enter a
monopolistically competitive
industry, the demand curves
of existing firms shift to the
left, pushing MR with them.
 In the long run, profits are
eliminated. This occurs for a
firm when its demand curve
is just tangent to its average
cost curve.
Suits Price TC TR MR MC AC Price TR MR
#1 #2
68 70 68 68 70 70 31.50 31.50 31.50
1
66 80 132 64 10 40 28.50 57.0 25.50
2
64 85 192 60 5 28.30 25.50 76.50 19.50
3
62 90 248 56 5 22.50 22.50 90.00 13.50
4
60 100 300 52 10 20.00 19.50 97.50 7.50
5
58 115 348 48 15 19.16 16.50 99.00 1.50
6
56 136 392 44 21 19.42 13.50 94.50 -4.50
7
54 164 432 40 28 20.50 10.50 84.00 -10.50
8
52 200 468 36 36 22.22 7.50 67.50 -16.50
9
50 245 500 32 45 24.50 4.50 45.00 -22.50
10
Summer Fun Answers
8b. 9 suits; $52.00 9e. 7 stores + 17 stores= 24 stores
in the Santa Barbara market.
$268.00 profits 24 stores x 4 suits = 96 suits sold
in the market.
8c. Economic Profit Total Costs =96 suits x
$22.50(AC)= $2160.00
Firms will Enter 9f. 6 suits at min. ATC of
9a.4 suits $19.16
9g. 96 suits/ 6 suits per store = 16
9b. $22.50; Zero stores in the market under PC
conditions.
9c. Yes. Firms are 96 x $19.16 = $1839.36
earning zero
economic profits M.comp. market= $2160.00 TC
less P.C.market= $1839.36 TC
9d. $22.50 Excess Capacity = $320.64
Excess Capacity Theorem !!!
Lesson 12 Objectives
 Define and discuss the nature of
monopolistic competition.
 Compare the four conditions that define
monopolistic competition with those of
perfect competition.
 When given cost and price data,
determine the output and price charged
by a monopolistic competitor in the
short-run and long-run.
Lesson 12 objectives.
 Explain why and how the long run equilibrium of a firm
under monopolistic competition differs from that of a
firm under perfect competition.
 Explain why firms under M.C. earn zero economic
profit in the long run even though they face a
downward sloping demand curve.
 Identify the wastes of monopolistic competition and
explain why product differentiation may off set these
wastes.
 Explain why monopolistic competitors are said to have
excess capacity.
 Describe the Excess Capacity Theorem.