New firms will enter a monopolistically competitive market...

New firms will enter a monopolistically competitive
market if
a. marginal revenue is greater than marginal cost.
b. marginal revenue is greater than average total cost.
c. price is greater than marginal cost.
d. price is greater than average total cost.

Key Concepts

Average Total Cost

Average total cost represents the total cost per unit of output produced. When a firm’s price exceeds its average total cost, it implies that the firm is covering all its costs and making a profit. This profit becomes an incentive for new firms to enter the market in a monopolistically competitive environment.

Monopolistic Competition

Monopolistic competition is a market structure characterized by many firms that sell differentiated products. Each firm has some control over its own prices due to product differentiation, and there are low barriers to entry and exit, which means that firms can enter the industry when they see potential profits and exit if they incur losses.

Economic Profit and Market Entry

Economic profit is the difference between total revenue and total costs (including opportunity costs). In the context of monopolistic competition, the presence of positive economic profits signals new firms to enter the market, increasing competition. Over time, this entry drives profits toward zero in long-run equilibrium.

Transcript

00:01 So when would firms enter a market? they'll enter a market and we can kind of think about this in a common sense sort of way when there's money to be made when there's some profit that's being made by other companies that they say, okay, i want my share.

00:16 So if we're thinking about this in kind of a short term scenario, when are firms going to be making a profit? so firms are going to be making a profit when they're going to have, okay, we talked about this earlier where we have a place where our marginal revenue and our marginal cost curves are determining some quantity queue right and at that quantity that's our profit maximizing quantity so we're going to be we're going to be creating that many goods so we'll have for example our demand curve here that's our demand curve and we'll have an average total cost curve which is basically telling us how much is a cost to make that quantity of goods.

01:04 So if we're making goods, if we're making q goods, then we're selling them for this price here.

01:12 We're selling them for price p.

01:15 Then what that means is that this box up here between the demand and the average total cost curve is all profit.

01:24 Basically, we're selling p times q and it's only costing us atc times q.

01:32 So, so another way to think about it is that your total revenue, the total revenue that you're making is greater than the total costs of production and of sales.

01:46 So that green box p is all profit.

01:49 So now someone's going to see that and they're going to say, okay, i want in.

01:52 I want to make some profit...

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