3.4.3 Monpolistic Competition

Question 1

What is monopolistic competition?

Answer 1

Combines elements of both monopoly and perfect competition

Question 2

What are the characteristics of a monopolistic competition

Answer 2

• many sellers
• product differentiation: firm produces a product that is similar but not identical
• easy entry + exit
• non - price competition
• imperfect information
• firms are price makers- but can’t set high prices as they can’t achieve supernormal profits

Question 3

CONCLUSIONS to the LR diagram:

Answer 3

• No allocative efficiency: as prices are greater than MC
• No productive efficiency: forgoing EOS - costs are being minimised
• dynamic efficiency: LR - no supernormal being made