monopolistic competition Flashcards
what is a monopolistic market structure?
this is a structure where there are many firms offering a similar product but with some product diffrentiation for e.g nail salons , hairdressing etc
what are the characteristics of monopolistic competition?
-nature of the product-The products are slightly differentiated
-customer loyalty - Relatively low due to number of substitutes
-some price setting ability
-low barriers to entry
-large number of small firms
-more competition pushes the firm to better efficiency , allocative efficiency in the long run
-abnormal profit in short run
-normal profit in long run
-low degree of market power
-shallow slope of the demand curve
what is abnormal profit ?
when the total revenue>total costs
how do firms in monopolistic competition maximise profits?
they produce up to the level of output where marginal cost= marginal revenue
the firm can make abnormal profit in the short run
what would a monopolistic market have to do to sell an additional unit
they would have to decrease the price , the marginal revenue curve will fall twice as quickly as the average revenue curve.
what happens when firms in monopolistic competition make abnormal profit to normal profit?
-new entrants are attracted to the industry and the number of sellers increase
-They are incentivised by the opportunity to make supernormal profit
-There are low barriers to entry and It is easy to join the industry
Abnormal profits will eroded , and the firm will return to the long-run equilibrium position of making normal profit.
what happens when firms in monopolistic competition make losses to normal profit?
-If firms in monopolistic competition make losses in the short-run, some will shut down
-The shut down rule will determine which firms shut down
-There are low barriers to exit, so it is easy to leave the industry
-For the remaining firms, losses will be eliminated, and the firm will return to the long-run equilibrium position of making normal profit
