Lesson 5 of 9 · All lessons in this module
- Revenue, economic profit and the MR = MC ruleVideo lesson
- Breakeven, shutdown and exit decisionsVideo lesson
- Short-run and long-run costs: economies and diseconomies of scale
- The four market structures and what defines them
- Monopolistic competition: price, output and the long run
- Oligopoly: kinked demand, Cournot, Stackelberg and price leadershipVideo lesson
- Oligopoly strategy: Nash equilibrium, collusion and the long runVideo lesson
- Identifying market structure: elasticity, concentration ratios and HHI
- Integrated cases: reading a market from the data
Lesson 5 of 9 · 12 min
Monopolistic competition: price, output and the long run
A monopolistically competitive firm sets output where MR = MC and charges what its downward-sloping demand allows; easy entry then erodes any economic profit, leaving zero profit at a price above minimum average cost.
In short
- Many firms sell close but differentiated substitutes; entry and exit are fairly cheap; firms have some pricing power and compete through advertising and branding.
- Each firm faces a downward-sloping demand curve, so MR < price.
- Optimal output: MR = MC; price comes from the demand curve. Short-run economic profit (or loss) is possible.
- There is no well-defined supply curve: the quantity offered depends on the shape of demand, not only on MC.
- Long run: entry shifts each firm's demand left until P = ATC (zero economic profit), but output is below the minimum-ATC level and price above minimum ATC.
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