Monopolistic Competition

Question 1

What are the characteristics of monopolistic competition?

Answer 1

• Many buyers/sellers
• Slightly differentiated products but close substitutes
• Firms are price makers to some extent
• Price elastic products
• Low barriers to entry
• Imperfect Information
• Profit Maximisers

Question 2

Why id monopolistic competition not productively and allocatively inefficient?

Answer 2

• Productive inefficient because they cant use economies of scale, because there a lot of sellers in the market
• Allocative inefficient because monopolistic firms can charge higher than the marginal cost.

Question 3

What are the advantages of monopolistic competition?

Answer 3

• Wide variety of choice for consumers
• A more realistic market structure than perfect competition
• Consumers may benefit from the increased range of choice on offer in the market.

Question 4

What do a large number of buyers and sellers in the market mean in monopolistic competition?

Answer 4

• No one buyer or seller has a large price setting power

Question 5

What do no barriers to entry or exit mean in monopolistic competition?

Answer 5

• This allows new firms to entre when supernormal profits are being made and some to leave in the case of losses.
• As a result, only normal profits can be made in the long run

Question 6

What do non- homogenous goods mean in monopolistic competiton?

Answer 6

• Means that individual firms do have some price setting power and so the curve is downward sloping.

Question 7

Why are firms not allocatively or productively efficient in monopolistic competition?

Answer 7

• As firms can only make normal profit in the long run, AC=AR
• And as firms profit maximise, MC=MR
• Productive Efficient: MC=AC
• Allocative Efficient: P=MC

Question 8

Why are firms in monopolistic competition likely to be dynamic effiecient?

Answer 8

• Since there are differentiated products and so know that innovative products will give them an edge over their competitors and enable them to make supernormal profits in the short run.
• However since firms are small, they may struggle to receive finance or have the retained profits necessary to invest.

Question 9

Monopolistic competition in comparison to perfect competition

Answer 9

• In monopolistic competition, less is sold at a higher price, compared to perfect competition.
• Firms may not necessarily be producing at the lowest cost
• EV: However, the market will offer greater variety and may be able to enjoy some degree of economies of scale