Chapter 16

In chapter 14 we went over perfectly competitive markets. In Chapter 15 we went over monopolies. This chapter mixes the two together and goes over monopolistic competition. Monopolistic competition is when may firms sell a product that is not identical, but similar. This means that they still have market power and their demand curve is downward sloping. However since they are in a competitive market the firms are still affected by other firms exiting and leaving. The price is still set above marginal cost so the firms still earn a profit and produce a deadweight loss. Also since the firms can earn a profit they spend money on advertising to attract new consumers.