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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

how do I view the graphs
Patricia Reply
how do I open the links
Patricia
what is the markert
Ester Reply
A market is any place where buying and selling can take place.
Landing
20. Why is a football game on ESPN a quasi-public good but a game on the NBC, CBS, or ABC is a public good?
Brigam Reply
how people make decision?
Xafsa Reply
what is supply and demand
Xafsa Reply
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price.
Landing
thank you very much
Xafsa
list and briefly explain the three principles that describe how the economy as whole works?
Xafsa
what is algebra?
ibiflower Reply
what is the relationship between price and demand
Evans Reply
the relation ship between price and demand is the income and Utility means when you are satisfied and you can buy it then you have to demand it.Thanks
Abdulkadir
who thought u that? you are not answering this as an economist
Evans
alright, but can you tell how the economist will be answered
Abdulkadir
alright, but can you tell me how the economist will be answered
Abdulkadir
Law of demanded  states: As price  of a good increases, the quantity demanded  of the good falls, and as the price  of a good decreases, the quantity demanded of the good rises.
Lewis
So, there is an inverse relationship between price and demand.
Lewis
lewis answered it perfectly
Evans
I want for market value for price. or cleance
Samantha
time ticket of value market down so double be self 1.09 but I 10 chesse for 1.09 bugger
Samantha
hi
Langanani
Without scarcity there would be no subject call Economics. Explain why?
Landing
because economics is the study of scarcity of resources and the satisfaction of basic human need
Pele
give an example of some action that has both amonetary and nonmonetary apportunity cost?
Aisha Reply
any action can be argued to have both. For instance, being in class has the opportunity cost of time you could be spent earning wages, or time that could've been spent leisurely.
DASRAT
absolutely
Abdulkadir
Really
DASRAT
there is no any action that hasn't both a monetary and non-monetary as said Mr Dasrat
Abdulkadir
thanks
Aisha
u Welcome
Abdulkadir
describe an important trade-off you recently faced?
Aisha Reply
Financial issues and careerPersonal life and work lifeMost people don't like the work they do. The interest they have is something different from the work they do and eventually forgo their interest. These are the three most important tradeoffs I have come across, yet there may be many in number.
DASRAT
still
Abdulkadir
Yah still
DASRAT
yes
Abdulkadir
why people make the choices they make and how economist go about explaining those choices
Asim Reply
what is tradeoffs
Asim
giving up one thing to have another
Shriyash
what is demand
Asim Reply
why demand and supply interact in a market
Asim
In the supply and demand model of price determination, there is never a surplus or shortage of goods at the equilibrium level. The market always settles at the point where supply equalsdemand. If demand increases (decreases) and supply is unchanged, then it leads to a higher (lower) equilibrium pric
DASRAT
why demand is based on need and wants ?
Asim
because there is scarcity of resources,whether you can not get whatever you want one time so you have to chooseen which you will choose that is your needs(basic) after that you can demand it on the other hand,every society would demand their basic needs when they recognized it. so ther is no demand
Abdulkadir
there is no demand if there is no needs and wants
Abdulkadir
Because when you have need and your wants is depends upon demand
DASRAT
what is other causes
Asim
overall demand is coused by an income and price,if the price satisfies to you and your income is enough to you the you will demand whatever you want
Abdulkadir
what is satiety ?
Asim
what is a different between marginal cost and marginal benefit
Ndumiso Reply
What is Tradeoff
Oumie Reply
What is traoff
Oumie Reply
It's tariff not traoff
DASRAT
I mean Tradeoff
Oumie
a balance achieved between two desirable but incompatible features; a compromise.
SHARMAKE
Thanks
Oumie
these problems of scarcity are been face by household companies and nation at large
Muafue Reply
will you please explain it more😭
kainat
i am economist and i need helping to be perfect person in that field
Dr
okay
kainat
Hey
DASRAT
yup
kainat
hi
louh
scarcity is inevitable as it ensures sanity and sanctity among men. it's alled 'the Lord's act'. The issue of the victims is just a simple one of Cause and Effect. Somebody or entity must be a recipient of whatever.
tolu

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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