By the end of this section you should be able to:
- Describe, using examples, the assumed characteristics of a monopolistic competition: a large number of firms; differentiated products; absence of barriers to entry and exit.
- Explain that product differentiation leads to a small degree of monopoly power and therefore to a negatively sloping demand curve for the product.
- Explain, using a diagram, the short-run equilibrium output and pricing decisions of a profit maximizing (loss minimizing) firm in monopolistic competition, identifying the firm's economic profit (or loss).
- Explain, using diagrams, why in the long run a firm in monopolistic competition will make normal profit.
- Distinguish between price competition and non-price competition.
- Describe examples of non-price competition, including advertising, packaging, product development and quality of service.
- Explain, using a diagram, why neither allocative efficiency nor productive efficiency are achieved by monopolistically competitive firms.
- Compare and contrast, using diagrams, monopolistic competition with perfect competition, and monopolistic competition with monopoly, with reference to factors including short run, long run, market power, allocative and productive efficiency, number of producers, economies of scale, ease of entry and exit, size of firms and product differentiation.