3.4.3 Monopolistic Competition

Question 1

Factors of monopolistic competition

Answer 1

• firms tend to be relatively small+ relatively small market shares
• production differentiation
• producers have some control over price = price makers = AR slopes downwards
• barriers to entry + exit are low = this allows producers to respond to changing profit signals
• profit maximisers MC=MR

Question 2

Another name for monopolistic competition?

Answer 2

Imperfect competition

Question 3

Explain a short run model (supernormal profit to normal profit)

Answer 3

• price maker = AR + MR downsloping (slightly flatter than monopoly)
• supernormal profit acts as a single = attracts new producers with new products = normal profit in the long run
• productively inefficient at Q as not at ATC minimal point
• allocatively inefficient as P>MC

Question 4

Why are firms price makers?

Answer 4

• due to them having differentiated product that is desirable by certain consumers

Question 5

When do firms make supernormal profit?

Answer 5

In the short run

Question 6

Short run profit maximisation analysis

Answer 6

• firms in monopolistic competition are able to make supernormal profit in the short run
• the AR curve is downsloping -> firm has market power due to production differentiation
• the firm produces at profit max. where MC=MR
• at this point AR>AC = supernormal profit

Question 7

Why is AR downsloping for monopolistic competition?

Answer 7

the AR curve is downsloping -> firm has market power due to product differentiation
- this means to sell an additional unit of outputput, the firm will have to decrease its price
- the marginal revenue curve will fall twice as quickly as AR

Question 8

Short run losses analysis?

Answer 8

• firms in monopolistic competition are are able to make losses in the short run
• the firm produces at profit max
• at this level AR<AC