3.4.3 - monopolistic competition

Question 1

what Is a monopolistic competitively market

Answer 1

Monopolistic competition is a form of imperfect competition, with a downward sloping demand curve. It lies in between the two extremes of perfect competition and monopoly, both of which rarely exist in a pure form in real life. Some examples of firms in monopolistic competition are ​hairdressers, estate agents and restaurants.

Question 2

what are the characteristics of a monopolistic market

Answer 2

● There must be a ​large number of buyers and sellers in the market, each of whom are relatively small and act independently. This means that no one buyer or seller has a large price setting power.
● There are ​no barriers to entry or exit​, allowing new firms to enter when supernormal profits are being made and some to leave in the case of losses. As a result, only normal profits can be made in the long run.
● The difference between monopolistic competition and perfect competition is that in monopolistic competition firms produce ​differentiated, non-homogenous goods or services. This means that individual firms do have some price setting power, and so the curve is downward sloping.

Question 3

Describe how the profit changes in a monopolistic market from the short run to the long run.

Answer 3

in the short run there is snp but as people have good knowledge of the market and there are low barriers to entry firms join, so the. demand for that original firm decreases meaning the firms revenue curves drop to a point where only normal profit Is made

Question 4

how efficient are monopolistic markets

Answer 4

● Since they can only make normal profit in the long run, AC=AR and since they profit maximise, MR=MC. Therefore, the firm will ​not be allocatively or productively efficient, ​as MR does not equal AR so AC cannot equal MC and AC cannot equal MR.
● They are likely to be ​dynamically efficient since there are differentiated products and so know that innovative products will give them an edge over their competitors and enable them to make supernormal profits in the short run. However, since the firms are small they may struggle to receive finance or have the retained profits necessary to invest.
● In monopolistic competition compared to perfect competition, ​less is sold at a higher price and firms may not necessarily be producing at the lowest cost. However, the market will offer ​greater variety and may be able to enjoy some degree of ​economies of scale​.