Most shops you know are in monopolistic competition: lots of them, each a little different.
Three features
Many firms
Cafés, hairdressers, restaurants on every street.
Differentiated products
Each has its own style, location or recipe.
Low barriers to entry
Opening another café is easy.
The points to remember
- Each firm's demand slopes down but is elastic: many close substitutes.
- It produces where MR = MC, like every firm.
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A new idea can earn abnormal profit for a while.
Our example (made-up numbers)
| Short run | Long run | |
|---|---|---|
| Output (MR = MC) | 40 | 20 |
| Price | €8 | €4.50 |
| Average cost | €4 | €4.50 |
| Profit | €160 abnormal | Normal |
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Rivals see the profit and move in. Low barriers let them.
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Remember it as: Short run: a profit box. Long run: AR just touches AC.
Quick reminder
- Axes: Costs, revenue up the side, Q along the bottom
- Curves: D1 = AR1 and MR1, then D2 = AR2 and MR2; MC and AC stay the same
- Marks: P1 and Q1 in the short run; P2 and Q2 in the long run
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
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Then the long run: entry shifts demand left until AR just touches AC.
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Paper 1 asked this in May 2023 and again in May 2024, as part (a) for 10 marks.
Explain why firms in monopolistic competition may earn abnormal profits in the short run but not in the long run.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |