Monopolistic Competition

Slide 2 presents the quantity of output for a firm under monopolistic competition.

Slide 3 explains the firm's pricing decision.

Slide 4 illustrates the firm's marginal revenue at its level of output.

Slide 5 illustrates total revenue.

Slide 6 illustrates the firm's ATC.

Slide 7 illustrates the firm's total costs as the firm's ATC x quantity of product.

Slide 8 illustrates the area of total revenue above the firm's total costs. This area represents the firm's profit.

The remainder of the slides pose questions and provide answers based on the graph.
Monopolistic Competition

Price/
Costs/
Revenue in
MC Locate the intersection of marginal revenue
$s (MR) and marginal cost (MC) and draw a
P line through the intersection from the
ATC
demand curve (D) to the X axis (Quantity).
This is the quantity of output for the
monopolistically competitive firm.

MR D

Q Quantity
Monopolistic Competition

Price/
Costs/
Revenue in
MC Locate the intersection of marginal revenue
$s (MR) and marginal cost (MC) and draw a
P line through the intersection from the
ATC
demand curve (D) to the X axis (Quantity).
This is the quantity of output for the
monopolistically competitive firm.

Draw a line from the demand curve to the Y

axis. This is the price the monopolistically
competitive firm will charge.
MR D

Q Quantity
Monopolistic Competition

Price/
Costs/
Revenue in
MC The firm will produce output to the point
$s where marginal revenue (MR) is equal to
P marginal cost (MC). If the firm produced
ATC
output at a level less than where MR=MC, it
would be forgoing revenue and, therefore,
reducing its profits. If it produced output at
a level greater than where MR=MC, its
MR additional costs would be greater than its
additional revenue, and it would be reduce
its profits.
MR D

Q Quantity
Monopolistic Competition

Price/
Costs/
Revenue in
MC This is the total revenue (TR) received by
$s the firm. It is the quantity of product sold
P multiplied by the product's price.
ATC

MR D

Q Quantity
Monopolistic Competition

Price/
Costs/
Revenue in
MC This is the firm's average total cost (ATC) at
$s this level of output.
P

ATC

ATC

MR D

Q Quantity
Monopolistic Competition

Price/
Costs/
Revenue in
MC This area represents the firm's total cost
$s (TC) at this level of output.
P

ATC

MR D

Q Quantity
Monopolistic Competition

Price/
Costs/
Revenue in
MC This area represents the firm's profit.
$s

P Total Revenue - Total Cost = Profit

ATC

MR D

Q Quantity
Monopolistic Competition

Price/
Costs/ At what level of output will this firm operate?
MC
Revenue in
$s
F OL
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ What is the marginal revenue at this level of output?
MC
Revenue in
$s
F 0B
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ What price will this firm charge for its product?
MC
Revenue in
$s
F OE
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ The area of which rectangle is equal to total revenue?
MC
Revenue in
$s
F OEFL
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ What is the firm’s average total cost?
MC
Revenue in
$s
F OC
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ The area of which rectangle is equal to the firm’s total
MC
Revenue in
$s
cost?
F
E OCHL
ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ Is the firm making profits or incurring losses?
MC
Revenue in
$s
F making economic profit
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity
Monopolistic Competition

Price/
Costs/ The area if which rectangle is equal to profits or losses?
MC
Revenue in
$s
F CEFH
E

ATC
D G
H
C

B K

A D
MR

O L M Quantity