Monopolistic Competition Flashcards
Characteristics of Monopolistic Competition
- Also known as Imperfect Competition
- Unlimited number of buyers and sellers in the market (many firms)
- No barriers to entry or exit (free entry)
- Differentiated goods - non-price competition is anything that firms do to try and make their goods stand out from others
- Varying degrees of market power - firm has some (small) price making ability, but there is less market power due to many substitutes
Examples:
Electronics companies
Candy
Hair salons
Restaurants and bakeries
Demand Curve
Generally elastic
Short Run
- Can have both abnormal profit and loss made in short run
- Abnormal profit induce entry as it is assumed that there are no barriers to entry
Abnormal profit diagram (short run)
Loss diagram (short run)
Long Run
- The long run is a period long enough for new firms to enter into the market.
- If potential firms see that profit is being earned they will attempt to enter the market.
- Compete by bidding down the price. Price will continue to fall until firms are operating at breakeven point
- Unable to make abnormal profit
What should be on the graph for Long run?
On your graph, indicate:
- Where a profit maximising firm will set output i.e. MR = MC (Q)
- Where a profit maximising firm will set price (P)
- The total revenue earned by the firm (PxQ)
- The profit earned by the firm (zero)
Efficiency
Firms in monopolistic competition face huge competition from other firms. They have little control over price, and as such, they are not technically or allocatively efficient.
Productive/Technical efficiency
Arises when firms pursue the least cost method of production and produce at minimum average cost (MC = AC)
Allocative/Economic efficiency
Arises when firms allocate resources into the production of goods desired by consumers (AR = P = MC)
Efficiency in short run (diagram)
Efficiency in long run (diagram)
