monopolistic competition Flashcards
what is monopolisitc competiton
competitive maket structure with some charcateristics of a monopoly
what are the 7 characterisitc of monpolistic competition
many buyers and seller (key)
sell *Slightky differentiated goods
firms are price makers
demand curve elastic
good info of mkt conditions
low BTE/E
Non price comp
firms are profit maximisers
because goods are slightly differntiated firmms are
price makers
firms are only lsightly price makers becuase and what does this mean for demand curve
very good substitutes are available so firms cant raise price signficiantly to exploot price making curves
so demand curve is ealstic
what fo low BTE/e mean
so firms can enter and leave at relatively low costs and easily
why is there non price comp
firms cant raise price significantly to make very high SNP
So focus on branding , quality of g/s
give me 4 exmaples of monopolsitic mkts
clothing mkt , taxis , fast food , restaurants
firm behaviour si differnt in the
SR and LR
What diagram do you draw for SR
MONOPOLY DIAGRAM
why do we draw monopoly diagram in SR
Because firms selling something relatively unique , GOT price making ability , profit max and end up with similar outcomes to monopoly
when drawing monopolistically comp how do we have to amke demand curve
price elastic - show through writing to
in the SR why is it possible for firms in monopolistic comp to make SNP
exploiting price making power given fact theyre selling a unique good so can be happy and make nice profits
IN THE LR what wont last
SNP
in the LR why wont SNP last
they’ll be eroded away
in the LR why do new firms enter mkt
attracted by SNP
why do new firms enter mkt attracted by SNP
Theres low BTE and good info of mkt conditions
So firms cna enter market and compete with establishedt firms ot erode SNP
as new firms enter mkt in the LR wha happens
demand for individual firms in mkt shift to the left as consumers are shared across a large numer of new firms
Demand keep shifting left till AR = AC - normal profit
what are th esteps to drawing a monopolisitc diagram
AR &MR curve first
MC -nike tick
Profit max P&Q which is MR = MC , Q1 na P1
AC - normal profit is new position as new first enter , D shifts left till NP made
Make sure AC touches AR and MC hits min of AC
BOTTOM DIAGRAM
at q1 in long run AR = AC we have got
normal profit
at first look when evaluating the LR what can we say
no alocative efficieny
no productive efficiencyt
no dynamic efficiency
explain why we know there is no allocative efficiency
price is greater than MC so no alloc efficient in LR
what are teh implication of no allocative efficiency in the LR
So consumers exploited in theory as prices greater than costs , ouptu and choice is restricted - bad for consumers
How do we know we not productivley efficient and what is teh impact
were not on min point of AC curve so were voluntarily foregoing EOS another reason for higher prices in mkt as costs not minimised
explain how we know there is no dynamic efficiency
no LR SNP ebing amde so not enough profit to be invested back into company for tech imporvemtns and better wualtiy products and innovation
after evaluating with effficiencies how we have a x mkt structure comapred to x comp and x comp
ineffiecient mkt structure
comapred to perf comp and monopoly copetition
but thinking hard what can we great economists do
make it sound like monpolisitc comp is hte best mkt structure
how are we gonna jazz up teh allocative inefficieny comapre to monoply
no allocative efficiency in monop either but not as bad .
Decent competition so price making ability of firms is lower
so prie exploitation not as bad as monopoly
- loss of CS not as bad as monp
- so compared to monp allocative inefficency is no where nea as bad
how are we gonna jazz up allocative inefiicney comapred to a perf comp mkt structure
what 2 things does pef comp have
compare this to real liek mkt example of mopoliittc ocmp
so what ae consumer willing to do
x can be even nseen as x
esp when x not as bad because …
perf comp does got allocative efficiency
but in perf comp we’ve got homo goods
which consumers wont want in mkts such as clothing and restaurants , we want differentiation
so were willing to pay more/erode some of our CS for differentiation
so allocative ineff can be seen as desirable
esp when exploitation not as bad as we think given there are good substitutes available
compare productive einefficney to monoplositc comp
nowhere near as bad compared to monp , there’s good substitutes so firms can t afford to forego EOS to same extent as monop and charge higher prices
compare productive efficiency to monopolistic comp
what is there not many of in perf comp - so what does this mean on mopolisitc side
P ineff could also be due to diff x of x
if got x than one product and range of prod processes - its harf to exploit
whereas if producing one good you can xx and achieve x and x
so prod ineff comes out of x x for x whic we are willing to pay x £
prod efficiency but in perf comp
not many EOS but monopolistic comp there are so any EOS being exploited are to greater extent than PC
so prices may acc still be lower than perf comp
P inefficiency in monopolistic comp might be due to product diff demands of consumer , our desire for variety may make it harder to exploit EOS as we have wide range of prod process -
if producing one good you can bulk buy and achieve financial and managerial ESO easily
- but more products = harder
so prod ineff comes out of consumer desire for diff which we wiling to pay slightly higher price for
how may we get dyno efficiency
if SR SNP are enough to invest
ina very comp mkt we can still get dyno efficiency if
noraml rpoftis are being reinvested
why might normal profits be invested
could be just part of comp in mkt for firms tohave to reinvest e.g clothing frims if they dont reivnvest and bring in new fashion lines as new seasons come along they fall behind sig and become less comp
So even if extent of reinvestment is small we still see dyno efficient in monop comp mkts esp if reinvestment part of comp
whats the other way we may get dyno efficiency
Firms may just reinvest to get a head of rivals even using very small scale profit to do so ,
so better than perf comp where no dyno efficiency + in monop where mght not occur many arg for dyno eff not to occur in monpo
how can we conclude our eval for monopolistic comp
looking at reality - we overcame theoretical inefficiencies
