Characteristics of monopolistic competition

Monopolistic competition is also known as competitive price-searcher

Markets requirements

• Large number of firms producing differentiated products
• no barriers to entry or exit
• Monopolistic competition: All firms are price searcher
• Face a downward sloping demand curve {highly elastic due to availability of close substitutes
• Max profit at MR=MC but charge price from demand curve

In the short run,

• price searcher maximizes profits by setting output where MR = MC

In the long run,

• low barriers increase new firms and competition drives demand curve down to the point where MR = ATC, and economic profit falls to zero

Benefits of Competition:

• increase efficient production and consumer satisfaction
• increase incentive for firm to find new and efficient technologies.
• increase in finding the optimal scale of production.