Examples of monopolistic competitionĮxamples of monopolistic competition can be found in every high street. At this point, firms have reached their long run equilibrium.Ĭlearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating, and further product differentiation. New entrants continue until only normal profit is available. Super-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left. Eventually, all super-normal profits are eroded away. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC).Īs new firms enter the market, demand for the existing firm’s products becomes more elastic and the demand curve shifts to the left, driving down price. Monopolistic competition in the short runĪt profit maximisation, MC = MR, and output is Q and price P. In the short run supernormal profits are possible, but in the long run new firms are attracted into the industry, because of low barriers to entry, good knowledge and an opportunity to differentiate.
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