Presented by
Miss Sanam Sattar
Introduction
 Monopolistic competition is a type of imperfect
competition such that many producers sell products that
are differentiated from one another as goods but not
perfect substitutes.
Characteristics
Many Sellers:
Many firms competing for the same number of customers
Product Differenciation:
Firms produce, similar but uniquely different products
Firms are not a price taker
Free Exit And Entry:
Free barriers to entry. The adjust accordingly until the
economic profits of all firms equate to zero.
Extensive Knowledge Of Prices:
Extensive knowledge of prices to both buyers and sellers
Lack Of Perfect Knowledge:
Buyers do not have perfect knowledge about the market
conditions.
Pricing Decision: A firm under monopolistic
competition is neither a price- taker nor a price-maker.
Presented by
Tehmina Hazoor
Monopolistic competition in Short run
 Short-run economic profits encourage new firms to
enter the market. This:




Increases the number of products offered.
Reduces demand faced by firms already in the market.
Incumbent firms’ demand curves shift to the left.
Demand for the incumbent firms’ products fall, and their
profits decline.
Figure 1 Monopolistic Competition in the Short Run
(a) Firm Makes Profit
Price
MC
ATC
Price
Average
total cost
Demand
Profit
MR
0
Profitmaximizing
quantity
Quantity
Copyright©2003 Southwestern/Thomson Learning
 Short-run economic losses encourage firms to exit the
market. This:




Decreases the number of products offered.
Increases demand faced by the remaining firms.
Shifts the remaining firms’ demand curves to the right.
Increases the remaining firms’ profits.
Figure 1 Monopolistic Competitors in the Short Run
(b) Firm Makes Losses
Price
MC
ATC
Losses
Average
total cost
Price
MR
0
Lossminimizing
quantity
Demand
Quantity
Copyright©2003 Southwestern/Thomson Learning
Monoplistic competition in long
run
 Firms will enter and exit until the firms are making
exactly zero economic profits.
Figure 2 A Monopolistic Competitor in the Long Run
Price
MC
ATC
P = ATC
Demand
MR
0
Profit-maximizing
quantity
Quantity
Copyright©2003 Southwestern/Thomson Learning
Presented by
Naseema Khan
Monopolistic competition vs
Perfect Competition
Monopolistic Competition Perfect competition
 Large number of buyers and
 Large number of buyers and
large number of sellers
 Products sell are different to
each other
 Sellers charge different prices
 Free exit and entry
sellers
 Product is identical
 Perfectly competitive market
 Free exit and entry
Examples
Clothing, Stationary Manufactures,
Crops
Thank you