Cambridge International as and a level Economics Ebook

particularly good examples. Th
ey may appear to be selling 
similar products, but in reality, their products depend upon 
the skills and recipes of their owners. Local hairdressers’ 
shops, market stalls, driving schools and travel agents also 
exhibit the characteristics of this market structure.
Figure 7.17
shows the equilibrium price and output 
in monopolistic competition. In the short run, the profi t-
maximising fi rm will be seen to make abnormal profi ts. In 
time these will be competed away by the entry of new fi rms, 
which will shift the fi rm’s original demand curve to the left . 
Th
is process will continue until all fi rms in the industry are 
making normal profi t. A key point though is that in both the 
short and the long run the fi rm is ineffi
cient. Th
is because 
it operates on but above the minimum point of its average 
total cost curve resulting in a situation of excess capacity. 
Additionally, the fi rm is not allocatively effi
cient as 
P
> MC.
TOP TIP
Monopolistic competition is not the same market 
structure as monopoly; firms in monopolistic 
competition do though have a type of monopoly over 
the diff erentiated products they sell.
Barriers to entry
Th
e existence of substantial barriers to entry into an 
industry diff erentiates oligopoly and monopoly from 
monopolistic competition and perfect competition.
Barriers to entry are a range of obstacles that deter or 
prevent 
new
fi rms from entering a market to compete with 
existing fi rms. Th
ey give fi rms a degree of market power 
in that decisions can be made by existing fi rms without 
Output
0
Cost/revenue
Cost/revenue
MC
Optimum
ATC
D
= AR
Q
MR
P
P
1
Output
0
MC
Optimum
ATC
D
= AR
Q
MR
P
P
1
(a) Short run
(b) Long run