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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 the meaning of function in economics
Effah Reply
Pls, I need more explanation on price Elasticity of Supply
Isaac Reply
Is the degree to the degree of responsiveness of a change in quantity supplied of goods to a change in price
Discuss the short-term and long-term balance positions of the firm in the monopoly market?
Rabindranath Reply
how are you?
can you tell how can i economics honurs(BSC) in reputed college?
through hard study and performing well than expected from you
what should i prepare for it?
prepare first, in psychologically as well as potentially to sacrifice what's expected from you, when I say this I mean that you have to be ready, for every thing and to accept failure as a good and you need to change them to potential for achievement of ur goals
parna kya hai behencho?
Hello, dear what's up?
good morning
pls, is anyone here from Ghana?
Hw s every one please
Ys please I'm in Ghana
what is firms
Anteyi Reply
A firm is a business entity which engages in the production of goods and aimed at making profit.
What is autarky in Economics.
what is choice
Tia Reply
So how is the perfect competition different from others
Rev Reply
what is choice
please what type of commodity is 1.Beaf 2.Suagr 3.Bread
Alfred Reply
what is the difference between short run and long run?
Ukpen Reply
It just depends on how far you would like to run!!!🤣🤣🤣
meaning? You guys need not to be playing here; if you don't know a question, leave it for he that knows.
pls is question from which subject or which course
Is this not economics?
This place is meant to be for serious educational matters n not playing ground so pls let's make it a serious place.
Is there an economics expert here?
Okay and I was being serous
The short run is a period of time in which the quantity of at least one inputs is fixed...
that is the answer that I found online and in my text book
Meaning of economics
Suraj Reply
It will creates rooms for an effective demands.
Chinedum Reply
different between production and supply
What is the economic?
Economics is a science which study human behavior as a relationship between ends and scarce means which has an alternative use.
what is supply
what is different between demand and supply
Debless Reply
Demand refers to the quantity of products that consumers are willing to purchase at various prices per time while Supply has to do with the quantity of products suppliers are willing to supply at various prices per time. find the difference in between
Please what are the effects of rationing Effect of black market Effects of hoarding
Atty Reply
monoply is amarket structure charecrized by asingle seller and produce a unique product in the market
Cali Reply
I want to know wen does the demand curve shift to the right
demand curve shifts to the right when there's an increase in price of a substitute or increase in income
ask me anything in economics, I promise to try and do justice to the question, you can send me an email or message, I will answer
what are the factor that change the curve right
explain the law of supply in simple .....
the Law of supply: states that all factor being equal, when the price of a particular goods increase the supply will also increase, as it decreases the supply will also decrease
@Nana the factor that changes or shift the d demand curve to the right is 1) the increase in price of a substitute good or commodity 2) increase in income
you can send your questions I am Comr. Kin chukwuebuka
different between bill of exchange n treasure bill
so would you tell me what means an apportunity cost plz?
what is true cost
your question isn't correct naadi
define an apportunity cost?
orukpe ,is my question whats wrong or u dont know anything?
In a simple term, it is an Alternative foregone.
opportunity cost is the next best value of a scale of preference
Both of you are not correct.
opportunity cost: is a forgone alternative
Monopoly is where is one producer produces a given product with no close substitute
what is income effect?
Qwecou Reply
if you borrow $5000 to buy a car at 12 percent compounded monthly to be repaid over the next 4 year what is monthly payment
Nitish Reply

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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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