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Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering. First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, the monopolist’s perceived demand curve is the market demand curve, while the perceived demand curve    for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces. Second, a monopolist is surrounded by barriers to entry and need not fear entry, but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.

Monopolistic competitors and entry

If one monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market. A gas station with a great location must worry that other gas stations might open across the street or down the road—and perhaps the new gas stations will sell coffee or have a carwash or some other attraction to lure customers. A successful restaurant with a unique barbecue sauce must be concerned that other restaurants will try to copy the sauce or offer their own unique recipes. A laundry detergent with a great reputation for quality must be concerned that other competitors may seek to build their own reputations.

The entry of other firms into the same general market (like gas, restaurants, or detergent) shifts the demand curve faced by a monopolistically competitive firm. As more firms enter the market, the quantity demanded at a given price for any particular firm will decline, and the firm’s perceived demand curve will shift to the left. As a firm’s perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too. The shift in marginal revenue will change the profit-maximizing quantity that the firm chooses to produce, since marginal revenue will then equal marginal cost at a lower quantity.

[link] (a) shows a situation in which a monopolistic competitor was earning a profit with its original perceived demand curve (D 0 ). The intersection of the marginal revenue curve (MR 0 ) and marginal cost curve (MC) occurs at point S, corresponding to quantity Q 0 , which is associated on the demand curve at point T with price P 0 . The combination of price P 0 and quantity Q 0 lies above the average cost curve, which shows that the firm is earning positive economic profits.

Monopolistic competition, entry, and exit

The two graphs show how under monopolistic competition profits induce firms to enter an industry and losses induce firms to exit an industry.
(a) At P 0 and Q 0 , the monopolistically competitive firm shown in this figure is making a positive economic profit. This is clear because if you follow the dotted line above Q 0 , you can see that price is above average cost. Positive economic profits attract competing firms to the industry, driving the original firm’s demand down to D 1 . At the new equilibrium quantity (P 1 , Q 1 ), the original firm is earning zero economic profits, and entry into the industry ceases. In (b) the opposite occurs. At P 0 and Q 0 , the firm is losing money. If you follow the dotted line above Q 0 , you can see that average cost is above price. Losses induce firms to leave the industry. When they do, demand for the original firm rises to D 1 , where once again the firm is earning zero economic profit.

Questions & Answers

What is Labour
Angela Reply
the service provide by the labourer is termed as labour.
Meaning of Standard of living
Fazrat Reply
pls what is the meaning of opportunity cost
Fazrat Reply
the cost of next forgone alternative is called opportunity cost. for example you have two choices, either work or study and you choose to study then the opportunity cost for study is the earnings which you can earn while opting job.
so what if I choose work it is the same as study
if you choose to work, then the cost of study is the opportunity cost for work
ohk tnx
welcome. much love .
how can inflation be defined
Mboko Reply
rise in general price level is called inflation.
when the price of goods and services rise, the cost of living also increases. basically the increase in general price level is call inflation
when demand increase and supply decrease .leads to fall of quality and volume index's leads to inflation .
inflation is a monitry policy that leads to continues increase in price of commodity in a geographical location with some period of time
what is economic
Enock Reply
economics is a science under which we study all those human activities which is related to scarcity with unlimited wants. By proff. Robbins .
it is a social science
what is the difference between macro economic and micro economic
Economic is a social science which studies human behaviour in relation to ends and scares means which have alternative uses
Economic is a social science that studies individuals, busnisses,governments, and deal deal with the entire society as a scarcity.
what is the indicator of economics development
Bibu Reply
how can you answer economic development
Mankaa Reply
Two things, first economic growth, just takes into account the increase in per capita income... Which is absolutely vague, important, but vague.On the other hand, Economic development, is a much more wider term. Visit my blog to know more about the differences, ***thetheoryofeconomics.blogspot.in
Problems faced by the trade union
Appiah Reply
Excuse me am new here
ashiru Reply
This app is used for studying and discussions. Hope it wil be useful for you.
If u have any questions, please feel free to ask.🙂
sereena i have a question.
I also have a question
can u tel me what are the must major part of economics which helps and is must to know before doing any business?
You can say me about question.
plz suggest me some books of economics & history for pg entrence exam.Only books for crack pg exam!
i think the most important part is marketing
is ny 1 replyin to my question
fatema i told your answer
thanks Mr fardin.. Dats really nice of u
you are welcome. the most important part in marketing for investment and making business is consumer behavior.
explain excess supply
Shalom Reply
surplus .
an excess supply or economic surplus is a situation in which the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determined by supply and demand
what is elasticity of demand
what is equilibrium?
equilibrium is when quantity demand is equal to quantity supply
equilibrium is when quantity demanded of a commodity is equal to the quantity supplied of that commodity
equilibrium is wen quantity demand is equal to quantity supply
how to differentiate long run and short run in monopoly?
shar Reply
Short run is a time period in which at least one factor of production is fixed; long run is when all factors of production are variable
what is exceptional supply
Wencelyne Reply
what is the relationship between quantity demanded and price in the function Qd =f(p)
Ahmed Reply
it means qty demand varies inversely with price
well, him in some places I saw it also as price function depending on offer, auctions style
it qty demand varies inversely with price
what is damand curve
Appiah Reply
it is the relationship between the quantity of goods and the price at which that quantity satisfies the demand
refers to the graphs that show the relationship between quantity demanded of commodities and that of the price of goods and services at thesame particular time.
is like a slope that shows the relationship between quantity that is demanded and also the price of G&S at the very same time
Can anyone provide any production function showing returns to scale with MPL
what is perfect competition market
Bright Reply
what is monopolistic

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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