Microeconomics Chapter 12

There are many buyers and sellers, low barriers to entry and firms compete by selling similar but differenciated goods and services.

• A monopolistically competitive firm is able to raise its price without losing all of its
• customers because the firm either has a favorable location, can offer better service, or has a higher quality product.

• a monopolistically competitive firm produces where price is greater than marginal cost.
• (economic profits if its price exceeds average total cost in the short run)

• low barriers to entry and short-run profits - lead to - entrepreneurs entering and establishing new firms. entry of new firms shifts demand curves of existing firms to the left - more elastic.
• ... and short-run losses - lead to - firms exiting the industry.
• This will shift the demand curves of remaining firms to the right - more inelastic.

When price equals ATC

tangent to its average total cost curve.

• (long run) the profit-maximizing level of output M.C. firm occurs where price is greater than marginal cost and the firm is NOT at the minimum point of its average total cost curve.
• Unlike a perfectly competitive firm, a monopolistically competitive firm does NOT achieve allocative efficiency or productive efficiency.

a perfectly competitive firm

a monopolistically competitive firm