Monopolistic competition

• Characteristics of a monopolistic market are:

  1. there are low barriers to entry and exit
  2. there are many firms in the market
  3. the products are slightly differentiated
  4. the knowledge in the market is perfect
  5. they are price makers
• A monopolistically competitive firms demand curve is the firms average revenue curve
• In the short run, firms can earn supernormal profits
• In the long run, there is a gradual decrease in profits because in the long run, several new firms can enter the market due to freedom of entry and exit
• The the long run, the AR curve is more elastic than in the short run. This is because of an increase in the amount of substitutes in the long run. Long run equilibrium is achieved when average revenue is equal to average cost