Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 16 of 36 - Monopolistic Competition
Section 7 of 15
…
Figure 4 - Monopolistic Competition versus Perfect Competition
Panel (a) Monopolistically Competitive Firm
· shows the long-run equilibrium in a monopolistically competitive market
· the firm produces a quantity less than the efficient scale
· price (P) is above marginal cost (MC)
Panel (b) Perfectly Competitive Firm
· shows the long-run equilibrium in a perfectly competitive market
· the firm produces a quantity at efficient scale, where average total cost (ATC) is minimum
At efficient scale, P = ATC = MC
…
Two main differences between monopolistic competition and perfect competition are, in monopolistic competition the firm
1· has excess capacity
2· sets price higher than marginal cost
…
1· Excess Capacity
Per panel (a) in a monopolistically competitive market
· suppliers’ free entry into and exit from the market
· drives each firm to the touch point of tangency of its demand curve and ATC
Here unit price = unit cost = ATC.
The firm breaks even, with no economic profits nor losses.
…
Per panel (b) in a perfectly competitive market price (P) and marginal revenue (MR) are given and constant.
Uniform product and free market entry/exit of firms drives firms to produce at the ATC minimum, here P = ATC.
The quantity where P = MC = ATC is called the efficient scale of the firm.
…
Firms are said to have excess capacity under monopolistic competition.
The firm could increase the quantity it produces and lower the ATC of production.
The firm forgoes this opportunity because it would have to lower its price to sell the additional output.
In this case MR would be less than MC, each additional unit produced would reduce profit or incur more losses.
…
When the monopolistic competitor
· produces quantity where P = ATC, efficient scale
· it gains zero economic profits, same as a perfectly competitive firm
Always, the monopolistic competitor
· wants to produce quantity where MR = MC
· at less than efficient scale
· maximizing profit or minimizing losses
… …
additional unit produced
tsuika yunitto seisan
追加ユニット生産

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