Some basic facts about monopolistic competition

1. Monopolistic Competition by Komilla Chadha
What is M.C?
M.C. is a market structure where a large number of buyers and sellers exist in market
where similar, differentiated products are sold. This model was created in the 1930s by the
economist Edward
What are the assumptions?
i. Downward sloping demand curve because they have a certain degree of monopolistic
power as their products are differentiated. This also allows them to be able to chose
what price they set it on. Furthermore, Chamberlin argues that the activity of one firm will
not influence the other firms in any way.
ii.A large number of buyers and seller.
iii.Perfect knowledge exists.
iv. There is no barriers to entry or exit.
v.Products are differentiated - the products are similar and thus can be substitutes but are
no means homogeneous. It is this characteristic in particular that can be assigned to
Chamberlin.
Equilibrium
Like perfect competition they are able to make abnormal profits in the short-run but this
would invite competition so in the long run they are only able to make normal profit.
Short-run diagram - supernormal profits

2. Long run - normal profits
Demand
The blue line shows that the industry has a normal elasticity demand curve yet this is
possible even though the individual firms have a red inelastic curve and functions like a
monopoly.