HL - Theory Of The Firm: Monopolistic Competition

Question 1

Assumptions of monopolistic competition

Answer 1

Large number of firms, each one has a small share of market power and cannot influence price.
Differentiated products
No barriers to entry and exit
E.g builders, local coffee shops, small independent hairdressers

Question 2

Revenue curves for monopolistic competition

Answer 2

Firms have a small degree of monopoly power so the demand curve is a negative slope.
But if one firm rises its prices the consumers will switch to a substitute. So the demand curve is slightly elastic.

Question 3

What’s the situation witch economic profit in monopolistic competition.

Answer 3

No barriers to entry or exit so economic profit can only occur on the short run

Question 4

What is non price competition?

Answer 4

Firms compete in other ways such as advertising, packaging etc.
The more unique the less elastic the demand curve will be, giving greater scope to exploit short run economic profit.
But they should build consumer loyalty on non price competition rather than reply on price competition.

Question 5

What are the criticisms of the model of monopolistic competition?

Answer 5

In reality there’s no freedom of entry and exit - there will be some costs
Due to product differentiation it’s not possible to have an industry demand curve, only one for individual firms.
Diagrams only take into account price competition

Question 6

Why is allocative or productive efficiency not achieved in monopolistic competition?

Answer 6

Because the point of allocative efficiency (where AR = MC) isn’t their profit maximising level of output.

Question 7

Are economies of scale fully exploited?

Answer 7

No they aren’t fully exploited