3.4.3 Monopolistic Competition Flashcards
1
Q
What are the characteristics of a monopolistically competitive market?
A
- large number of buyers and sellers
- heterogenous goods
- little/no barriers to entry
- good imformation
- non price competition
2
Q
Give the analysis of a monopolistically competitive market in the short run?
A
- firms can make supernormal profit in the short run
- shown by Q1 multiplied by the vertical distance between P1 and P2
- firms can exploit their price making ability because they sell slightly differentiated products
3
Q
Give the analysis of a monopolistically competitive market in the long run?
A
- supernormal profits will be eroded away becuase new firms can enter the market due to the supernormal profit
- this is due to good imformation and low barriers to entry
- AR = D shifts left as consumers are spread across more firms
4
Q
What is the process of drawing a monopolistically competitive market in the long run?
A
- AR and MR curves
- MC
- Draw on profit maximise point
- AC
5
Q
Are firms in a monopolistically competitive market allocatively efficient?
A
No, because for a firm to be allocatively efficient because price is greater than marginal cost
6
Q
Are firms in a monopolistically competitive market productively efficient?
A
No because the market is not at the minimum point on the AC curve
7
Q
Are firms in a monopolistically competitive market dynamically efficient?
A
No, because there is no long run supernormal profit
