3- More On Price Making Firms Flashcards
What’s monopolistic competition
Market which producers are price makers, even with lots of firms and that each firm acts independently
What’s monopolistic competition a mix of
Monopolistic competition and perfect competition
Fundamental assumptions of monopolistic competition
- Sellers are price makers
- Sellers are not strategic
- Entry to market is free
- Buyers are price takers
What’s profit maximisation for monopolistic competition
MR = MC (same as monopolies and oligopolies)
Process of entry takes time therefore useful ….
Useful to distinguish between short run and long run equilibrium
Difference in monopoly and monopolistic competition graphs
They’re the same, however the MR and D curves are flatter for monopolistic competition (especially for short run equilibrium)
What will happen in the long run equilibrium in monopolistic competition
The demand curve for (specific firms) will shift inwards, as more firms will enter the market as it is free entry, therefore more substitutes for consumers
- Causes long run economic profit of 0, as demand curve shifts left, P = AC
What’s excess capacity theorem
This theory states, it would be more efficient if output was produced by a few firms in the market place (many different biscuit brands for example)
- This would be at the expense of variety (organic ones, help diabetes)
- Too Many firms in the market wasting resources
Market equilibrium compared with efficient outcome
See whether market over or under provides variety, we must compare efficient number of firms with actual number of firms in long run market equilibrium
Why’s slope downward sloping as there’s more firms in the market (in the analysis of efficient amount of variety graph)
Curve downwards as there’s less profit when more firms enter market
Difference between graphs of firms perspective and consumer perspective on variety
Firms perspective = Slopes downwards as there’s less profit when more firms enter market (more variety)
Consumers perspective = Slopes upwards as more firms enter the market, higher consumer surplus, enjoy lower prices as competition rises; curve becomes flat as there comes a point as there’s too much variety.
Can express total surplus as (graph in book)
Producer surplus + Consumer surplus
- Too much variety = Different types of biscuits in a supermarket
- Too little variety = Living in a small village, not enough takeaways
Why monopolistic competition is less efficient than perfect competition
Monopolistic competition:
- Excess capacity = Quantity is not at minimum ATC (its on the downward-sloping portion of ATC)
- Mark-up over Marginal cost: P>MC
Perfect competition:
- Quantity is at minimum ATC (efficient scale)
- P=MC
