5.6 monopolistic competition Flashcards
what is monopolistic competition
has characteristics of both monopoly and perfect competition
what are the characteristics of monopolistic competition?
many buyers and seller
each firm sells slightly differentiated goods
only slight price makers due to lots of goods and firms so cant exploit
price elastic demand curves
low barriers to entry/exit
good information
lots non price competition
we assume firms are again profit maximisers where MC=MR
examples of markets that examine monopolistic competition
clothing, hair dressers, bars, etc.
what can firms make in the short run in monopolistic competition
supernormal profit/ same as monopoly diagram. by exploiting price making power and making a unique good
what will happen to profits in the long run
profits erode away as firms enter due to profit incentive due to low barrier to entry and good information so firms can compete as new firms enter demand for individual firms will shift to the left as consumers are shared with lots of firms until supernormal profit dry’s up and only normal profit can be made
is monopolistic competition allocatively efficient
no as price is greater than marginal cost in the long run (stable position), consumers exploited as prices are greater than costs, output restricted etc.
is monopolistic competition productively efficient
no as not at bottom of average cost curve so voluntary forgoing economies of scale so higher prices in market
is monopolistic competition dynamically efficient
no as no long run supernormal profit is being made.
why is allocative inefficiency not so bad in monopolistic competition?
allocative efficiency, in monopolistic competition their is some good competition so price making ability is lower and price exploitation is not as bad as monopoly + perfect comp consumer only get homogenous goods in real life consumers are willing to pay more for differentiated goods e.g. clothes etc especially when exploitation isn’t as bad due to lots of competition
why is productive inefficiency not so bad in monopolistic competition?
compared to monopoly not as bad due to close substitutes
compared to perfect competition their isnt many economies of scale but prices may be lower due to some market power, product differentiation demand makes it hard to exploit economies of scale as buying many goods compared to one
why is dynamic inefficiency not so bad in monopolistic competition?
could argue dynamic efficiency in short run if enough to reinvest
still get even if normal profits are reinvested to compete as they have to. e.g. of clothing brands don’t introduce new lines/fashion they will fall behind.
better than perfect comp and in monopoly even if could they most likely wouldn’t
