Monopolistic competition

Question 1

characteristics of monopolistic competition

Answer 1

• Many buyers and sellers
• Slightly differentiated goods
• Firms are price makers – limited by the competition in the market
• Price elastic demand – so firms can only make small changes to price
• Low barriers to entry/ exit
• Good information
• Non price competition – as firms can’t raise prices too significantly
• Firms are profit maximisers

Question 2

examples of industries with monopolistic competition

Answer 2

hairdressers
nightclubs

Question 3

why doesn’t short run SNP last?

Answer 3

Low barriers to entry and good information therefore new firms attracted by SNP, compete with existing firms and erode away profit.

Demand will shift in and in, to where normal profit is being made.

Question 4

ae?

Answer 4

P> MC, so no being met in the long run. Consumers are exploited, choice is restricted, output is restricted

Question 5

pe?

Answer 5

not being met

Question 6

dynamic efficiency

Answer 6

not being met either – seems very inefficient.

Question 7

Short run graph =

Answer 7

Monopoly graph

Question 8

Xe?

Answer 8

This is possible as the firm does face competitive pressures to cut cost and provide better products.