Monopolistic competition

Question 1

State the 3 features of monopolistic competition

Answer 1

• There are many small buyers and sellers.
• Low barriers to entry or exit which means firms can easily enter and exit the market.
• Differentiated goods. All goods must be similar but slightly different.

Question 2

What is happening to profit within monopolistic competition in the short run

Answer 2

The firms is profit maximising in the short run
- Price is above Average cost = supernormal profits can be made.

Question 3

State what will happen to profit in the long run form monopolistic market structures (include what will happen on the diagram )

Answer 3

supernormal profits will incentivise new firms to enter the market.
- There arelow barriers to entry, so new firms will enter the market, stealing customers from existing (or incumbent) firms.
- This will decrease their demand (or AR), shifting AR and MR down, until AR just touches the firm’s AC curve - so only normal profit will be left and all the supernormal profit is gone

Question 4

What are monopolistic firms subject to

Answer 4

Non price competition

Question 5

How do monopolistic firms use non price competition

Answer 5

They goods are differentiated and is attract customers through their goods rather than the price