Monopolistic Competition

Key Terms & Concepts

Product differentiation and role of advertising: There is significant competition and the products are fairly similar so in order to maximize profits firms tell the consumer (through advertising) how their product is different.

Profit maximization: Occurs where MR=MC. Firms can have a long run profit that depends on branding and product differentiation.

Short-run and long-run equilibrium: In the short run, firms can earn an economic profit. Over time as more firms enter the DEMAND and MARGINAL REVENUE curves for the individual firm decrease to ZERO economic profit.

Excess capacity and inefficiency: In the long run, economic profits are zero but the firms could have produced more and the price is still greater than the marginal cost.

Monopolistic Competition