3.4.3 - Monopolistic competition

Question 1

What is monopolistic competition?

Answer 1

perfect competition but with differentiated products

Question 2

Market characteristics for monopolistic competition

Answer 2

1) product is not homogeneous
2) high levels of knowledge/information
3) firms are quite small
4) very low barriers to entry
5) set your own price -> some price making ability

Question 3

Demand for monopolistic competition

Answer 3

Downward sloping demand (D) curve -> BUT high competition and lots of substitutes -> elastic demand

Question 4

Can they make profit in the short run?

Answer 4

SR - only supernormal profit or loss is possible

Question 5

Can they make profit in the long run?

Answer 5

LR - only normal profit is possible, since new firms ‘steal’ profit

Question 6

Is monopolistic competition efficient?

Answer 6

No, allocative efficiency - price/AR does not equal MC
productive efficiency - not at minimum AC point

Question 7

What is consumer choice theory?

Answer 7

the lack of efficiency might not be seen as a problem since consumers are just happy they get choice within the economy