I) CHARACTERISTICS

1)

2)

Firms compete with each other on the basis of:

➢

➢

➢

➢

3)

As a result of these characteristics:

➢ The monopolistically competitive firm is a ________________________________________

➢ The monopolistically competitive firm faces a _____________________________________

II) PROFIT MAXIMIZING FOR A MONOPOLISTICALLY COMPETITIVE FIRM

▪ Since the monopolistically competitive firm has some price-making power, we know it can affect its profit by controlling both its level of output Q AND its price P. ▪ As a result, the monopolistically competitive firm will produce a Q where profit is maximum (Q* or profit-maximizing level of output) and THEN find out the maximum price P* it can charge for that output. A) Choosing Q* using the MR = MC approach: THE PROFIT-MAXIMIZING RULE

B) Pricing decision: After deciding what the profit-maximizing level of output is, the monopolistically competitive firm will set the highest price the market will allow for that level of output. This is exactly what the demand curve tells us.

III) MONOPOLISTIC COMPETITION SHORT RUN PROFIT POSSIBILITIES

1) Economic profit:

2) Normal profit:

3) Economic loss:

Two possibilities:

1) Minimize losses by continuing production:

2) Minimize losses by shutting down production:

➢ THUS: Monopolistic competition in the short-run resembles monopoly.

IV) FROM THE SHORT RUN TO THE LONG RUN

A) If firms are earning short-run economic profit ( other firms have incentive to _________ the market ( demand for each firm _______________ ( individual firms’ profits ____________ for three reasons: 1) Market price ________ 2) Quantity