monopolistic comeptive markets

Question 1

Disadvantages of monopolistically competitive markets

Answer 1

Firms are allocatively inefficient in the short and long run (P>MC)
Since firms do not fully exploit their factors, there is excess capacity in the market. This makes firms productively inefficient.
Dynamic efficiency might be limited due to the lack of supernormal profits in the market.
Firms are not as efficient as those in a perfectly competitive market. As they have little incentive to minimise their costs.

Question 2

Advantages of monopolistically competitive markets

Answer 2

Consumers get a wide variety of choice.
The model of monopolistic competition is more realistic than perfect competition.
The supernormal profits produced in the short run might increase dynamic efficiency through investment.

Question 3

chartericts of monopltic competition

Answer 3

The presence of many companies.
Each company produces similar but differentiated products.
Companies are not price takers.
Free entry and exit in the industry.
non price competition