3.4.3 Monopolistic competition Flashcards

1
Q

Characteristics of monopolistic competition

A
  • Many buyer + sellers
  • Slightly differentiated goods
  • Firms are price makers - however, changes in price can only be slight because demand is elastic
  • lower barriers to entry + exit
  • Good information on market conditions
  • More of non-price competiton
  • Firms are profit maximisers MC=MR
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2
Q

Why can monopolistic competition have supernormal profit in the short-run

A

Supernormal profit in the short-run will therefore attract new suppliers offering new products

demand curve for an existing firm shifts to the left as some consumers opt to buy products offered by new or alternative companies

so MR/AR shift inwards until it is tangential to the AC curve and the firm will now make normal profits

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3
Q

What does the long-run monopolistic competition graph look like

A
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4
Q

What types of efficiency does monopolistic competition have

A

Non

Price is greater than MC so not allocatively efficient

Not at lowest point of AC curve so not productively efficient

No supernormal profits so not dynamically efficient

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5
Q

Evaluation point of monopolistic competition

A
  • loss of consumer surplus will not be s bad compared to a monopoly
  • Differentiate goods are more beneficial to consumers
  • Economies of scale exploited to a greater extent
  • Short-run supernormal profits maybe great enough to gain dynamic efficiency
  • reinvestment maybe something which must be done to stay in the market - e.g. the clothing industry
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