Monopolistic Competition In Microeconomics

Market Structure:

The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market

Four basic types of market structure are (1) Perfect competition: many buyers and sellers, none being able to influence prices. (2) Oligopoly: several large sellers who have some control over the prices. (3) Monopoly: single seller with considerable control over supply and prices.

Monopolistic Competition:

Monopolistic Competition' Characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry

It is a form of competition that characterizes a number of industries that are familiar to consumers in their day-to-day lives. Examples include restaurants, hair salons, clothing and consumer electronics. To illustrate the characteristics of monopolistic competition, we'll use the example of household cleaning products.

Number of firms

Say you've just moved into a new house and want to stock up on cleaning supplies. Go to the appropriate aisle in a grocery store, and you'll see that any given item—dish soap, hand soap, laundry detergent, surface disinfectant, toilet bowl cleaner, etc.—is available in a number of varieties. For each purchase you need to make, perhaps five or six firms will be competing for your business.

Product Differentiation

Because the products all serve the same purpose, there are relatively few options for sellers to differentiate their offerings from other firms'. There might be "discount" varieties that are of lower quality, but it is difficult to tell whether the higher-priced options are in fact any better. This uncertainty results from imperfect information: the average consumer does not know the precise differences between the various products, or what the fair price for any of them

If average total cost is below the market price, then the firm will earn an economic profit.

• D = Market Demand

• ATC = Average Total Cost

• MR = Marginal Revenue

• MC = Marginal Cost

As can be seen in the graph, the market price charged by the monopolistic competitive firm is equal to the point on thedemand curve where MR = MC.

Short-Run Profit = (Price - ATC) ×Quantity

Losses:

However, if the average total cost is above the market price, then the firm will incur losses, which will be equal to the average total cost minus the market price multiplied by the quantity produced. It will still minimize losses by producing that quantity where marginal revenue equals marginal cost, but eventually the firm will either have to reverse the losses, or it will have to exit the industry.

Short-Run Loss = (ATC - Price) × Quantity

Long run Equilibrium: Normal Profits

If the competitive firms in an industry earn an economic profit, then other firms will enter the same industry, which will reduce the profits of the other firms. More firms will continue to enter the industry until the firms are earning only a normal