Term
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Definition
| market in which firms can enter freely, each producing its own brand or version of a differentiated product |
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Term
| two key characteristics of a monopolistically competitive market |
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Definition
1.Firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes. In other words, the cross-price elasticities of demand are large but not infinite.
2. There is free entry and exit:it is relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their products become unprofitable. |
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Term
| Monopolistically Competitive Firm in the Short Run |
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Definition
Because the firm is the only producer of its brand, it faces a downward-sloping demand curve.
Price exceeds marginal cost and the firm has monopoly power.
In the short run, described in part (a), price also exceeds average cost, and the firm earns profits shown by the yellow- shaded rectangle. |
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Term
| Monopolistically Competitive Firm in the Long Run |
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Definition
In the long run, these profits attract new firms with competing brands. The firm’s market share falls, and its demand curve shifts downward.
In long-run equilibrium, described in part (b), price equals average cost, so the firm earns zero profit even though it has monopoly power. |
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Term
| Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium |
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Definition
Under perfect competition, price equals marginal cost.
The demand curve facing the firm is horizontal, so the zero- profit point occurs at the point of minimum average cost.
Under monopolistic competition, price exceeds marginal cost.
Thus there is a deadweight loss, as shown by the yellow- shaded area.
The demand curve is downward-sloping, so the zero profit point is to the left of the point of minimum average cost. |
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Term
| In both types of markets, entry occurs until... |
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Definition
| profits are driven to zero. |
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