March 21, 2018 

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AFC: The abbreviation for average fixed cost, which is fixed cost per unit of output, found by dividing total fixed cost by the quantity of output. Average fixed cost is one of three related cost averages. The other two are average variable cost and avarage total cost. Average fixed cost decreases with larger quantities of output. Because fixed cost is FIXED and does not change with the quantity of output, a given cost is spread more thinly per unit as quantity increases. A thousand dollars of fixed cost averages out to $10 per unit if only 100 units are produced. But if 10,000 units are produced, then the average shrinks to a mere 10 cents per unit.

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A principle stating that monopolistically competitive firms seek to maintain similarities between products at the same time they promote differences. Similarities enable substitutability, such that one firm can attract the buyers away from other firms. Differences enable uniqueness and market control, such that each firm has market control and is able to charge a higher price than achieved with perfect competition. This principle is also termed Hotelling's paradox.
The principle of minimum differences is a guiding feature of monopolistic competition. It is based on the notion that monopolistically competitive firms seek product differentiation, just not too much. Product differentiation provides a firm with market control and the ability to charge a higher price for its product than it might otherwise. However, minimizing product differences maintains substitutability with competitive products.

Consider how this principle works for the monopolistically competitive restaurant market in Shady Valley. Manny Mustard's House of Sandwich is one participating firm. Manny's specialty, the Deluxe Club Sandwich, offers a prime example of this principle.

  • First, Manny must make sure that his product is similar to other products. At the very least, being that he is operating in the restaurant industry, his Deluxe Club Sandwich must be a food product. Should Manny replace his bread, lettuce, tomatoes, and meat, with cardboard, plastic, aluminum, and barbed wire, then he cannot compete effectively for food-hungry buyers. If Manny hopes to attract a lunch crowd, then he must sell food.

    Taking this a step farther, if Manny hopes to compete with other establishments selling club sandwiches, then his club sandwich must be similar to their club sandwiches. If they use ham, turkey, and bacon, then he needs to use ham, turkey, and bacon. If he leaves off the bacon, then he does not have a club sandwich, he has a ham and turkey sandwich.

  • Second, within the specifics of this product type, Manny can seek differences from the competition. This is why Manny makes his Deluxe Club Sandwich with barbecue sauce rather than mayonnaise. He could also use leaner, fat free, cuts of ham and turkey. Perhaps he could use homemade bread. Maybe he could chop his bacon rather than using strips.

    The key, of course, is that Manny seeks to make his Deluxe Club Sandwich a little different from the hundreds of other club sandwiches available in the market. The uniqueness of Manny's Deluxe Club Sandwich is what gives him a teeny, tiny monopoly-slice of the overall market. This is what allows him to charge a slightly higher price than that paid for a generic, run-of-the-mill, nothing-special-about-it, club sandwich.

The ongoing challenge for monopolistically competitive firms is to balance the differences and the similarities. Too many similarities and a firm loses its customers to the competition. Too many differences and it loses its customers to the competition.


Recommended Citation:

PRINCIPLE OF MINIMUM DIFFERENCES, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 21, 2018].

Check Out These Related Terms...

     | monopolistic competition, advertising | product differentiation |

Or For A Little Background...

     | production | satisfaction | monopolistic competition | monopolistic competition, characteristics | monopolistic competition, efficiency | perfect competition | perfect competition, characteristics | perfect competition, efficiency | market control |

And For Further Study...

     | competition among the many | market structures | third rule of subjectivity | monopolistic competition, short-run production analysis | perfect competition, short-run production analysis |

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