Monopolistic Competition Flashcards

1
Q

Real life examples of monopolistic competition

A

Hairdressers, estate agents, restaurants

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2
Q

characteristics of monopolistic competition

A
  • Large number of buyers and sellers
  • No barriers to entry or exit
  • Non homogenous goods
  • some price setting powers
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3
Q

How does monopolistic competition have some price setting powers

A

Firms produce differentiated goods or advertising which allows them a degree of price making power

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4
Q

what way does monopolistic competitions demand curve slope

A

downwards

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5
Q

What happens to the demand curve if the products are less differentiated

A

It becomes more elastic

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6
Q

Can monopolistic competition firms make supernormal profit

A

They can due to product differentiation but only in the short run due to low barriers to entry

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7
Q

What will happen to monopolistic competition supernormal profits in the long run

A

The demand curve (AR) will shift to the left as the demand is split between more firms reducing supernormal profits until it touches the AC curve tangentially as this is when it returns to normal profit

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8
Q

Are Monopolistic competition firms statically efficient

A

No as they aren’t producing at the lowest point on the AC curve so aren’t productive and are producing above MC = AR so aren’t allocative

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9
Q

How are monopolists competition firms dynamically efficient

A

The products are differentiated so they can innovate better quality products or production methods
–> Hard to obtain finance to innovate because supernormal profits are only short run and firms are small, risky due to low barriers

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10
Q

Can firms in monopolistic competition exploit economies of scale

A

Yes because they have some control over price and their goods so can grow
–> Limited because they can’t grow that big due to low barriers to entry, if they grow others will join

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11
Q

why do firms in monopolistic competition have higher AC

A

They spend more on differentiating their product with advertising mainly to try and create brand loyalty

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12
Q

Why don’t monopolists competition firms experience all the economies of scale they could

A

They have to profit maximise so they limit output which limits the effect of economies of scale if they limit their growth

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