4.3 Monopolistic Competition Flashcards
What are the characteristics of a monopolistically competitive market
Imperfect competition
Short run profit maximisers
Product differentiation
Large number of buyers and seller
Compete using non-price competition
No barriers to entry and exit
Show and explain profit maximising in the short run in a monopolistically competitive market
Firms profit maximise at MC = MR
Area P1C1AB shows supernormal profits
Show and explain profit maximising In the long run in a monopolistically competitive market
New firms enter the market in the long run meaning supernormal profits are competed away
Firms aim to stay in the short run by differentiating their products and innovating
Advantages of a monopolistically competitive market
Firms are allocatively efficient in the short run
There is excess capacity in the market which makes firms productively inefficient
Consumers get wide variety of choice
More realistic than perfect competition
Supernormal profits might increase dynamic efficiency through investment
Disadvantages of a monopolistically competitive market
In the long run dynamic efficiency might be limited due to lack of supernormal profits
Firms are not as efficient as in a perfectly competitive market. This is because firms have x-inefficiency
