3.4.3

Question 1

Characteristics of monopolistically competitive markets

Answer 1

A monopilistically competitive market has imperfect competition
Firms are short run profit maximisers
Firms sell non-homegeneous products due to branding
The model is based on the assumption that there are a large number of buyers and sellers, which are relatively small and act independently
Each seller has the same degree of market power as other sellers
There are no barriers to entry to and exit from the market
Buyers and sellers in a monopolistically competitive market have imperfect information

Question 2

Profit maximising equilibrium in the short and long run

Answer 2

In the short run, firms profit maximise at the point MC=MR
In the long run, new firms enter the market since they are attracted by the profits that existing firms are making

Question 3

How can firms try to stay in the short run

Answer 3

By differentiating their products and innovating

Question 4

Advantages of monopolistically competitive markets

Answer 4

-firms are allocatively efficient in the short run and long run
- since firms do not fully exploit their factors, there is excess capacity in the market, this makes firms productively inefficient
- consumers get a wide variety of choice
- the model of monopolistic competition is more realistic than perfect competition
- the supernormal profits produced in the short run might increase dynamic efficiency through investment

Question 5

Disadvantages of monopolistically competitive markets

Answer 5

• in the long run, dynamic efficiency might be limited due to the lack of supernormal profits
• firms are not as efficient as those in a perfectly competitive market