MICROECONOMICS

MODULE 8
I. Topic: Monopolistic Competition

II. Objectives:
At the end of this chapter, the student is expected to enumerate the
characteristics of a monopolistic competitions and be able to explain how long-run
profit maximizing prices and output are achieved in a monopolistic competitive
market when entry of new firms to the market is blocked and when entry is open.

III. Lecture Proper:

The term monopolistic competition is a market organization in which there is a
relatively large number of small firms, producing a homogeneous product with
close substitutes, while product differentiation is when producers turns out
variations or close substitute of a given product.

Market structures are classified into two categories:

1. Monopolistic competition
2. Oligopoly

Product differentiation
Ex. When a consumer wants to buy a toothpaste, he specifies the brand of toothpaste he
wants. He goes to a store and order “close-up” or “colgate” product differentiation has
several dimensions. “Real” differences can exist through functional features, material and
design which are important aspects of differentiation normally product differ in the effective
use of advertising, packaging, trademarks, and brand names.

Monopolistic Competition
Ex. Medicine tablets for headache available in the market (biogesic, medical, advil). Pure
competition requires millions of producers. Producers and sellers charge somewhat different
prices depending on consumer’s acceptance of the differentiated product.

The short-run equilibrium

Under monopolistic condition a firm does not have time to change its plant size.
Individual firms can make price and output adjustments.
A comparison of monopolistic competition, monopoly and pure competition.
The firm under monopolistic competition is likely to produce fewer goods and change
relatively higher price than pure competition. There is less number of producers existing
under monopolistic competition. Less number of firms under monopolistic competition
would enable producers to change higher prices than under price competition.
In comparison with monopoly, firms are likely to have greater output, lower prices, and
lower profit the firms in a product group may obtain profits if they will collude if entry into
the industry is blocked.
The firms under monopolistic competitive becomes inefficient as they tend to operate
with excess capacity. This inefficiency is not forms in pure competition.
 The prices are relatively high under a monopolistically competitive firms. Consumer
would receive less welfare than a purely competitive economy.
In a long run, price will equal the average cost of production unless entry with industry
is block. When entry is free and easy, the company economic of productive capacity can
follow consumers taste and preferences with a high degree of accuracy.

Activity 1
Name: _________________ Date: ______________
Course/ Year: ________________

1. What is product differentiation? Give an example.

2. What are the factors of product differentiation?

Activity 2
Name: _________________ Date: ______________
Course/ Year: ________________

1. What is monopolistic competitive?

2. Give an example of monopolistic competition.

Prepared by:
Renee Q. Villaruel
Product differentiation is what makes your product or service stand out to
your target audience. It’s how you distinguish what you sell from what your
competitors do, and it increases brand loyalty, sales, and growth.
Focusing on your customers is a good start to successful product
differentiation. What do they wan
It is also the process of
differentiating one product or
service from others in designed
to appeal to a specific group of
customers. This entails
distinguishing it from both
competitors' and a company's
own products.