5.2 Monopolistic Competition

Question 1

characteristics of monopolistically competitive markets

Answer 1

firms are short run profit maximisers
product differentiation
no barriers to entry or exit
buyers and sellers have imperfect information

Question 2

what do buyers and sellers have in monopolistically competitive markets

Answer 2

imperfect information

Question 3

why can firms in a monopolistically competitive markets raise their price without losing all of their customers

Answer 3

because they have a downward sloping demand curve

Question 4

how do firms in a monopolistically competitive market compete

Answer 4

using non price competition

Question 5

what are examples of firms in monopolistically competitive markets

Answer 5

hairdressers

plumbers

Question 6

advantages of firms operating in a monopolistically competitive market

Answer 6

firms are allocatively efficient
consumers have a wide variety of choice
supernormal profits in the short run might increase dynamic efficiency through investment

Question 7

disadvantages of firms operating in a monopolistically competitive market

Answer 7

in the LR dynamic efficiency may be limited due to the lack of supernormal profits
firms are not as efficient as those in a perfectly competitive market