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Monopolistic Competition
Characteristics of monopolistic competition:
1 A large number of potential buyers and sellers.
2 The products offered by each seller are close substitutes, each tries to differentiate its products.
3 Entry into and exit from the market are possible with fairly low costs.
4 Firms have some pricing power.
5 Suppliers differentiate their products through advertising and other non-price strategies.
The most distinctive factor: product differentiation.
The extent to which the producer is successful in product differentiation determines pricing power in the market.
Supply Analysis in Monopolistic Competition:there is no well-defined supply function.
Short-Run Equilibrium in Monopolistic Competition:π = TR – TC
Optimal Price and Output in Perfect Competition:costcompetitive firm earns zero economic profit in the long run.
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