shift from monopolistic competition to perfect competition

Within limits, then, the restaurant can set its own prices it does not take the market prices as given. Because the restaurant is different from other restaurants, some people will continue to patronize it. Suppose a restaurant raises its prices slightly above those of similar restaurants with which it competes. Other industries that engage in monopolistic competition include retail stores, barber and beauty shops, auto-repair shops, service stations, banks, and law and accounting firms. Each restaurant has many close substitutes-these may include other restaurants, fast-food outlets, and the deli and frozen-food sections at local supermarkets. Restaurants are a monopolistically competitive sector in most areas there are many firms, each is different, and entry and exit are very easy. Monopolistic competition is a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit. However, because of the availability of close substitutes, the price-setting power of monopolistically competitive firms is quite limited. Product differentiation gives firms producing a particular product some degree of price-setting or monopoly power.

This differentiation may occur by virtue of advertising, convenience of location, product quality, reputation of the seller, or other factors. This model differs from the model of perfect competition in one key respect: it assumes that the goods and services produced by firms are differentiated. The model of monopolistic competition assumes a large number of firms. The first model of an imperfectly competitive industry that we shall investigate has conditions quite similar to those of perfect competition. Explain what it means to say that a firm operating under monopolistic competition has excess capacity in the long run and discuss the implications of this conclusion.Explain and illustrate both short-run equilibrium and long-run equilibrium for a monopolistically competitive firm.Explain the main characteristics of a monopolistically competitive industry, describing both its similarities and differences from the models of perfect competition and monopoly.

Shift from monopolistic competition to perfect competition