Monopolistic Competition Flashcards
How does monopolistic competition work
Firms share characteristics of both monopoly and perfect competition. The monopoly firm emerges due to product differentiation and perfect competition due to free entry and absence of barriers to entry
What assumptions underpin monopolistic competition
Large number of firms
No significant barriers to entry
Product differentiation on basis of branding location quality
How do you draw the monopolistic competition demand curve
Downwards sloping, as firms have some degree of market power, but less inelastic than monopoly
Why do firms differentiate products in mon-comp
To exploit the human desire for differentiation/identity in order to get more market share
How does LR equilibrium work out in Mon-comp
In SR firms may produce positive economic profits, but in LR more firms will enter the market due to lack of barriers to entry, so supply increase and demand decrease, firms make normal profit
In the SR, what determines profit for mon-comp
The position of the ATC relative to equilibrium price
Efficiency in mon-comp (consult picture of diagram)
Allocatively inefficient as MC greater than MB
Productively inefficient as price is not at min ATC.
Output at profit max is also lower than output at min ATC (aka capacity output)
In what sense is PC better than mon-comp
If all firms in a mon comp market produced at capacity output, for the same level of total output in the market there could be less firms operating and lower resource use overall
