Monopolistic Competition
| English | Chinese | Pinyin |
|---|---|---|
| monopolistic competition | 垄断竞争 | lǒng duàn jìng zhēng |
| differentiated product | 差异化产品 | chā yì huà chǎn pǐn |
| short run | 短期 | duǎn qī |
| normal profit | 正常利润 | zhèng cháng lì rùn |
| free entry and exit | 自由进出 | zì yóu jìn chū |
| long-run equilibrium | 长期均衡 | cháng qī jūn héng |
| tangent | 相切 | xiāng qiè |
| average total cost | 平均总成本 | píng jūn zǒng chéng běn |
| excess capacity | 过剩产能 | guò shèng chǎn néng |
| non-price competition | 非价格竞争 | fēi jià gé jìng zhēng |
| product differentiation | 产品差异化 | chǎn pǐn chā yì huà |
A street of bubble-tea shops
- A dozen tea shops on one street, each with its own flavours and vibe.
- Lots of competition — yet no two are quite the same.
- That mix of many rivals plus a little uniqueness has its own model.
- It is monopolistic competition 垄断竞争.
Many firms, differentiated products
- Many firms compete, but each sells a slightly differentiated product 差异化产品 (restaurants, salons, clothing brands).
- That small difference gives each firm a little market power — and a downward-sloping demand curve.
- In the short run 短期, it maximises profit like a monopoly ($MR = MC$, price up on demand), earning profit or loss.
Monopolistic competition has:
Many firms compete, but each product is a little different — giving slight market power.
Long run: only normal profit
- There is free entry and exit 自由进出. Profit attracts new firms that steal customers, shifting each firm's demand left.
- Entry stops only when economic profit is zero.
- At this long-run equilibrium 长期均衡 the demand curve is just tangent 相切 to the average total cost 平均总成本 curve — normal profit 正常利润.
Cost curves and the firm
In the long run, free entry shifts each firm's demand until it just touches average total cost — the firm earns only normal profit, with excess capacity.
In long-run equilibrium, a monopolistically competitive firm earns:
Free entry competes profit away until demand is tangent to ATC — normal profit.
Match each term to its meaning.
Differentiation gives market power; the long run brings excess capacity and normal profit.
Two inefficiencies remain
- Price still exceeds marginal cost ($P > MC$) — allocatively inefficient.
- The firm does not produce at the lowest ATC, leaving excess capacity 过剩产能.
- To compete without cutting price, firms use non-price competition 非价格竞争: product differentiation 产品差异化, branding, and advertising.
In long-run equilibrium, a monopolistically competitive firm produces at the lowest point of its ATC curve.
It produces to the left of minimum ATC, leaving excess capacity.
Monopolistic competition is allocatively inefficient because price is greater than ______ cost.
P > MC means the last unit is worth more than it costs, yet is not made.
Select all examples of non-price competition.
Branding, design and service compete without price; cutting price is price competition.
Monopolistic competition = many firms with differentiated products and a little market power. Short run: profit or loss like a monopoly. Long run: free entry drives economic profit to zero (demand tangent to ATC — normal profit), but with $P > MC$ and excess capacity.