LS11 : Monopolistic Competition

Question 1

what are three characteristics of monopolistic competition?

Answer 1

• product differentiation
• freedom of entry
• low concentration (many small firms)

Question 2

explain the product differentiation characteristic of monopolistic competition?

Answer 2

firms compete by making its product slightly different. builds up brand loyalty, giving them influence over price. firms engage in heavy advertising to maintain brand loyalty - common characteristic of MC. this separates MC from monopoly, where products are homogenous

Question 3

explain the freedom of entry characteristic in monopolistic competition.

Answer 3

very low barriers to entry into the market. firms join if existing firms are making SNP. new entrants differentiate products. this distinguishes MC from monopoly.

Question 4

explain the low concentration characteristic in monopolistic competition.

Answer 4

concentration ratio tends to be low as there are many firms operating in the market. due to this, a price change by one of the firms will have negligible effects on the demand for its rivals products

Question 5

why is the demand curve sloping downwards in monopolistic competition?

Answer 5

demand is relatively price elastic since there are substitutes for each firms goods

Question 6

draw the short-run equilibrium under monopolistic competition diagram.

Answer 6

show supernormal profit

Question 7

why is the assumption of free entry in monopolistic competition important?

Answer 7

profits made by existing firms will attract new firms into the market. new firms produce differentiated products.

Question 8

how does the demand curve change in relation to new firms entering the market in monopolistic competition?

Answer 8

• shift to the left : new firms attract customers away from existing firms due to differentiated products
• become more elastic : more substitutes are available since more firms

Question 9

draw the long-run equilibrium under monopolistic competition diagram.

Answer 9

show normal profit

Question 10

what is efficiency like in monopolistic competition?

Answer 10

from figure 2 we can deduce that the firm :
- does not have productive efficiency as they are not producing on minimum point on LRAC
- does not have allocative efficiency as P≠MC