Monopolistic competition facts for kids
Monopolistic competition is a market form. Like with Perfect competition, there are many buyers and sellers. But the market is not perfect. This is because the products are not homogeneous, or because the buyers have explicit or implicit preferences.
This market form is quite common. As an example, take a bakery. There are many bakeries in the town, but one of those bakeries can demand a slightly higher price for bread, because it is the only one in a certain part of the town.
Monopolistically competitive firms are able to gain a greater degree of market share and as a result, increase prices. If a particular bakery is known for selling the best pies and pasties in town, they can increase their prices for pies and pasties as they know consumers will pay slightly more for a superior product. This is known as establishing a brand name and brand loyalty.
Images for kids
Short-run equilibrium of the firm under monopolistic competition. The firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm is able to collect a price based on the average revenue (AR) curve. The difference between the firm's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit.
Long-run equilibrium of the firm under monopolistic competition. The firm still produces where marginal cost and marginal revenue are equal; however, the demand curve (and AR) has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profit
Monopolistic competition Facts for Kids. Kiddle Encyclopedia.