My students favorite clip when discussing product differentiation is this clip from MedicoreFilms where a guy offers Deluxe Hugs for $2 more. One of his opening lines best illustrates the concept of monopolistic competition:
Deluxe guy: How’s businesses?
Free guy: Mine are free, this isn’t a business.
Deluxe guy: Different people want different stuff, so it’s cool.
Businesses can differentiate their products by quality, style, location, etc. The guy offering deluxe hugs is trying to fill a portion of the market from people willing to pay more for “better” hugs.