Imperfect Competition

Question 1

What is the Difficulty with an Oligopoly?

Answer 1

Firms must Recognise Interdependence

–> Their Output affects Market Price–> Affects Rival’s Output

Question 2

What are the 3 main characteristics of Monopolistic Competition?

Answer 2

Large Number of Small Firms
No Barriers to Entry
Differentiated Products

Question 3

What does Demand look like in Perfect Competition + Monopolistic Competition?

Answer 3

Perfect Competition- Horizontal Demand- P=AR=MR=D

Monopolistic Competition- Downward Sloping- D=AR

Question 4

Why is Demand Downward Sloping in Monopolistic Competition?

Answer 4

Differentiated Products- customers attracted by features other than Price
-e.g. Brand Loyalty- can Increase P without total loss of Demand

Question 5

What does SR Profit look like in Monopolistic Competition?

Answer 5

Supernormal Profit
MR=MC
ATC < D = AR at Qsr

Question 6

What does LR Profit look like in Monopolistic Competition?

Answer 6

Normal Profit
MR=MC
ATC = D = AR at Qlr

Question 7

Why is there only Normal Profit in LR Monopolistic Comp.?

Answer 7

Supernormal Profit–> New Entry into Market–> Lower Demand for Firms–> Lower MR–> NORMAL Profit

Question 8

What does SR Losses look like in Monopolistic Competition?

Answer 8

Subnormal Profit
MR=MC
ATC > D = AR
Q* = Loss Minimising Output

Question 9

What does LR Losses look like in Monopolistic Competition?

Answer 9

Normal Profit
MR=MC
ATC = D = AR
Loss–> Firms Leave Market–> Demand becomes Less Elastic–> Increased Demand for Remaining Firms–> Normal Profit

Question 10

What are the 3 main differences between Perfect Competition + Monopolistic Competition?

Answer 10

• Variety + Choice for Consumer
• Costs NOT Minimised in Monopolistic
• P > MC but 0 Economic Profit in LR- Monopolistic