Monopolistic Competition Flashcards
1
Q
Characteristics of Monopolistic Competition
A
- 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
2
Q
Demand Curve
A
Generally elastic
3
Q
Short Run
A
- 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
4
Q
Abnormal profit diagram (short run)
A
5
Q
Loss diagram (short run)
A
6
Q
Long Run
A
- 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
7
Q
What should be on the graph for Long run?
A
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)
8
Q
Efficiency
A
Not productively or allocatively efficient
9
Q
Productive/Technical efficiency
A
Arises when firms pursue the least cost method of production and produce at minimum average cost (MC = AC)
10
Q
Allocative/Economic efficiency
A
Arises when firms allocate resources into the production of goods desired by consumers (AR = P = MC)
11
Q
Efficiency in short run (diagram)
A
12
Q
Efficiency in long run (diagram)
A
