Introduction
Monopolistic Competition and Oligopoly
An illustration of the monopolistically competitive firm's profit-maximizing decision is provided in Figure
1 .
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The firm maximizes its profits by equating marginal cost with marginal revenue. The intersection of the marginal cost and marginal revenue curves determines the firm's equilibrium level of output, labeled Q in this figure. The firm finds the price that it can charge for this level of output by looking at the market demand curve; if it provides Q units of output, it can charge a price of $ P per unit of output. The firm is shown earning positive economic profits equal to the area of the rectangular box, abcd. Negative economic profits (losses) are also possible.
The monopolistically competitive firm's behavior appears to be no different from the behavior of a monopolist. In fact, in the short-run, there is no difference between the behavior of a monopolistically competitive firm and a monopolist. However, in the long-run, an important difference does emerge.
