Lesson 8 - Theory Of The Firm: Monopolistic Competition

Question 1

What are the characteristics of monopolistic competition?

Answer 1

• large number of small firms
• some larger firms
• firms can differentiate their products
• some pricing power

Question 2

What are the different types of non price competition?

Answer 2

• product
• place
• promotion

Question 3

Give an example of monopolistic competition

Answer 3

Coffee shops

Question 4

How do firms in monopolistic competition maximise profits in the short run?

Answer 4

• can maximise profits where MR = MC
• demand curve is more elastic, since there are partial substitutes in the market

Question 5

How do firms in monopolistic competition maximise profits in the long run?

Answer 5

• demand will shift to the left as new firms enter the market, and customers are attracted to these substitutes
• eliminates any supernormal profits, and gives a long run price that is equal to average costs

Question 6

What are the advantages of monopolistic competition?

Answer 6

• partial substitutes offer choice
• competition will encourage productive efficiency, and lower costs can be reflected through lower prices
• short run supernormal profits incentivises innovation (dynamic efficiency)
• some firms can enjoy economies of scale

Question 7

What are the disadvantages of monopolistic competition?

Answer 7

• some market power = increased producer surplus (especially in the short run)
• barriers may slow down competitors responses
• not always productively efficient