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Monopolistic Competition
AP Microeconomics · Unit 4 Imperfect Competition
Learning Objectives
Short Run: Firms can earn economic profit (P > ATC) or losses (P < ATC). Differentiated products give some market power.
Long Run: Free entry/exit drives economic profit to zero. Demand curve is tangent to ATC → P = ATC.
Excess Capacity: In long run, firms produce below the minimum of ATC. This is the social cost of product variety.
Key Features: Many sellers, differentiated products, free entry/exit, downward-sloping demand (unlike perfect competition).
Tags
MonopolisticCompetitionProfitLong Run
Time Period
FIRM ANALYSIS
Price (P):$8
Quantity (Q):5
ATC at Q:$6
Economic Profit:$10
Short Run Profit: With differentiated products, the firm faces a downward-sloping demand. MR=MC determines output Q*, then price is read from the demand curve. If P > ATC → economic profit (green area). New firms will enter, shifting demand left until profit = 0.