B2.01.18: Intro to Monopolistic Competition

Question 1

Define Monopolistic Competition

Answer 1

A market structure with a large number of firms producing similar but slightly differentiated products

Question 2

What are the assumptions of monopolistic competition

Answer 2

• many buyers and sellers
• Slightly differentiated goods as firms are price makers and demand is price elastic
• Low barriers to entry/exit
• Good information
• Non-price competition
• Firms are profit maximisers

Question 3

How to draw monopolistic competition diagram in short and long run

Answer 3

Short Run:
- Same as the Monopoly diagram

Long Run:
- AC Touches D=AR

Question 4

Is monopolistic competition efficient in the short run and why

Answer 4

• Not AE nor PE

But, supernormal profit is being made which:
- Creates incentive for firms to join
- Firms can join as there’s low Barriers to Entry

Question 5

Is monopolistic competition efficient in the long run and why

Answer 5

• Not AE nor PE

But, supernormal profit’s competed away:
- Profit is equal to opportunity costs thus, no longer making supernormal profit and it’s making normal profit

Question 6

2 examples of monopolistic competition

Answer 6

• Food stalls
• Plumbers