[MUSIC] Let's model graphically the market structure of monopolistic competition. Again, this is a market structure where we have many firms but each of the firms is producing a slightly different product. This is the market for a particular firm, for example, a particular granola bar and they're facing a downward sloping demand curve. Suggesting that they are substitutes to these granola bars but nonetheless, some people would stick with this granola bar even if the price rose a little bit and more people would want to purchase this granola bar if the price dropped. Hence, a downward sloping demand curve. The firm has an upward sloping marginal cost curve and like all profit maximizing firms, it will choose to produce where marginal cost is equal to marginal revenue. Downward sloping demand means we have a downward sloping marginal revenue that lies below it and the profit maximizing quantity can be found here. This is the monopolist output and we go up to the demand curve to find the monopolist price. This seems just like a regular monopolist and indeed in the short run, the firm could be making a profit. Let me add an average total cost curve that is consistent with the firm making a profit. We can see the firm's profit, the difference between price and average total cost times the quantity. Here are the firm's profits, and this firm is a happy firm but this firm is not going to be happy for long. This firm is a monopoly but don't forget, it is also partly a competitive environment. Other firms look at this industry, they realize that this industry is profitable and they have the option of entering the industry. This is a model where we have free entry and exit. What will happen as new firms enter the industry? As new firms enter the industry, this particular firm, this particular manufacturer of granola bars, will see their demand curve shift in a little bit as some customers are siphoned off to the competition. As the demand curve shifts in, so does the marginal revenue curve and the firm has to readjust and think, what is the quantity that maximizes profit? Let's think now what will this story look like in the long run? Let's go ahead and do that.