3.4 - Monopolistic Competition

Question 1

What is monopolistic competition?

Answer 1

Form of imperfect competition
Moderately competitive market

Question 2

What are the characteristics of monopolistic competition?

Answer 2

Many buyers + sellers
Low concentration ratio
Perfect information
Low entry/exit barriers
Product differentiation
Firms aim to profit maximise

Question 3

Why does monopolistic competition create normal profit in the long run?

Answer 3

No entry barriers
Short run profits attractive
Demand for 1st firm shifts inwards
Levels out when = AC

Question 4

Describe the profit maximisation point in a monopolistic market

Answer 4

MC = MR
AR > AC short run
AR = AC long run

Question 5

Are monopolistic markets allocatively efficient?

Answer 5

Prices > MC
Equilibrium not allocatively efficient

Question 6

Are monopolistic markets productively efficient?

Answer 6

Market saturation
Difficult to exploit EoS
Drives LRAC up
Not productively efficient

Question 7

Are monopolistic markets dynamically efficient?

Answer 7

Able to earn supernormal profit in SR
Normal profits achieved in long run
Limited capacity to reinvest

Question 8

What is the n firm concentration ratio?

Answer 8

% of market share occupied by n number of firms

Question 9

What does the concentration ratio infer about competitiveness?

Answer 9

Lower ratio - Higher competition
Higher ratio - Less competition
Lower ratio = More small firms