Notes for 2.11.8 Monopolistic competition - IB | RevisionDojo
2.11.8 Monopolistic competition Notes
As mentioned before, monopolistic competition differs from perfect competition as it has some market power and some product differentiation
This means that firms in monopolistic competition can affect the price, hence having a downwards sloping demand curve.
This demand curve is more elastic than in monopoly, but less elastic than in perfect competition.
Profit Maximization for Monopolistic Competition
Short Run Profit
In the short run, a firm in a monopolistic competition would earn a profits similar to a monopolist.
Abnormal profit
Normal profit
Loss
The only difference is that the demand curve of monopolistic competition is more elastic
Long Run Profit
Figure 1: firms in a monopolistic competition market make normal profits in the long run
In the long run, the firms in monopolistic competition make normal profits.
This can be seen in the Figure 1 as the firms make normal profit.
This is because in the short run when the firms make abnormal profits:
New firms will enter the market, and attract customers from different firms in the market towards them.
Therefore the demand for the goods of these existing firms in the market will go down until it becomes tangent to the AC curve.
At this point the P will equal to AC, meaning the firm makes normal profit.
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Questions
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Question 1
Recap question
A sudden cost increase causes several firms in a monopolistically competitive industry to incur short-run losses. Which sequence of events best describes the market’s adjustment toward long-run equilibrium?
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Note
In economics, monopolistic competition refers to a market structure where many firms sell products that are similar but not identical. This concept combines elements of both monopoly and perfect competition, hence the name.
Firms have some market power due to product differentiation, meaning they can influence prices to some extent.
Products are differentiated through branding, quality, features, or services, but they serve the same basic function.
Examples include restaurants, clothing brands, and consumer electronics.
AnalogyThink of monopolistic competition like a food court with many different burger restaurants. Each restaurant sells burgers, but they differentiate themselves through taste, presentation, or additional services.
DefinitionMonopolistic CompetitionA market structure characterized by many firms selling similar but not identical products, allowing for some degree of market power and price control.
