Monopolistic Competition Flashcards
What is monopolistic competition?
Form of imperfect competition, many firms selling differentiated products, this means that it has a downward sloping AR curve but a high cross price elasticity.
What are the characteristics of monopolistic competition?
Easy entry to the industry
Product differentiation
A large number of sellers
Why is cross price elasticity high in monopolistic competition?
Because there are many similar substitutes.
What are differentiated products?
Product quality
Product performance
Quality of after sales
How is short run price and output determined in a market structure determined by monopolistic competition??
MR= MC
Demand is likely to be price elastic.
AR= downward sloping
There will be a supernormal profit.
What is a supernormal profit?
Any profit above normal profit .
What is a normal profit?
Minimum profit required to stay in a market or an industry in the long run= opportunity cost and earn a return.
What happens when AR=AC
It means you are breaking even and making normal profit.
What are the short run dynamic in this market structure?
Barriers to entry and exit are low.
Non price competition - meaning lots of customers switching takes place.
How is long run price and output determined in this market structure?
High profits signals the entry of new firms with new products. Brings in the principle of minimum products meaning that you get a lot of switching between consumers and producers.
How do you draw the long run equilibrium graph for monopolistic competition ?
Draw AC first and MC intersecting in the middle of AC.
Draw AR first, make sure it’s in tangent to AC.
Draw Q2 and the price level.
When MC=MR profit maximising.
Sales maximise when AR=AC
