1

Microeconomics

Student’s Name

Institutional Affiliation

Professor’s Name

Date
 2

Microeconomics

McDonald’s and Dominoes have characteristics of a monopolistic competition market

structure. Equilibrium in perfectly competition market structure is the point where market

demand equals the market supply. It is a point where the price of the firm is determined .In the

long run, the two market forces (demand and supply) will interfere with the equilibrium in a

perfect competition market and hence the economic profit cannot be sustained. If new firms

arrives in the market or the existing firms are expanded at constant returns then the horizontal

demand curve of each firm shifts downward; this causes the price, the marginal revenue curve

and the average curve to go down .The result is that, the firm will make normal profit. In the

short run, a firm makes an economic profit where the price or average revenue is above average

cost. (Masterclass, 2021).

Monopolistic competition market structure has a large number of firms compete for

market share and have similar products. A market structure is classified based on the main

attributes such as number of firms (Arintoko et.al, 2021). A firm’s short- run equilibrium under

monopolistic competition has the revenue curves sloping downward. This is because a firm has

to decrease the price so as to sell more. In this stage, a firm can either earn supernormal profits,

normal profits or make losses. A firm earns super normal profits when the demand is very high.

New firms cannot enter the group and improve the supply of the the product group hence they

cannot compete away the super normal profits. Also a firm has certain fixed costs, that is, selling

and production costs. The average revenue and marginal revenue curves of the firm slope have a

negative slope.

A firm’s long-run equilibrium under monopolistic competition has no fixed costs thus the

firm can vary the selling costs and inputs. A firm cannot operate at a loss since it can leave the

industry whenever it wishes to. Once a firm exits the industry, the absolute shares of the
 3

remaining firms increase making their demand curves to shift to the right. The demand curve of a

firm cannot stay above the long run curve.

 4

References

MasterClass Staff., (2021) Monopolistic Competition: 3 Examples of monopolistic Markets.

Retrieved from: https://www.masterclass.com/articles/monopolistic-competition-guide

Arintoko, Ahmad, A.A., & Habibah, S.N., (2021) Market Structure and Determinants of Firm

Profitability on General Insurance Industry in Indonesia. Retrieved from:

https://sciendo.com/article/10.2478/sbe-2021-0003