monopolistic competition Flashcards
what type of profit is made in the short run
supernormal profit
what type of profit is made in the long run
normal profit
what are the characteristics
many buyers and sellers
products slightly differentiated
low barriers to entry
price makers
non- price competition e,g ads, branding, quality of product
firms profit maximize
why do they not produce at minimum ATC
because their goods are slightly differentiated meaning firms can only be price makers slightly as there are very good substitutes available as there’s a lot of other firms due to the low barriers of entry- this means they cant raise prices too significantly as the D curve is price elastic so consumers will stop consuming if its too high
due to differentiation, also means they don’t produce enough to achieve economies of scale that would minimize ATC as different production lines
why do they only have normal profit in the short run
new firms enter as theyre attracted to the SNP which erodes away the existing firms SNP
whats the process that happens to individual firms when moving from SNP to NP
d for an individual firm in the market will keep shifting leftwards until AC=AR which is where normal profit is made
are they allocatively efficient
no
how can we compare this to monopolies as an advantage (eval)
there is comp in the market- meaning there is a variety of choices due to differentiated products.
price making ability is lower so exploitation is not as bad so loss of consumer surplus isn’t as bad and people still have access to goods or services
how can we compare this to perf comp as an advantage (eval)
homogenous goods in perf comp- is this what consumers desire?
no, they like differentiation- offers a wide range of options that cater to diverse tastes and preferences
whats an example of this
clothing stores- consumers willing to erode consumer surplus for the differentiation so allocatively efficiency not that bad
are they productively efficient
no
compare to monopoly
not as bad as there is differentiation- good substitutes. firms cannot afford to undergo economies of scale as there are barriers in the form of differentiation to the same amount as monopoly which may be due to differentiation which is good for consumers as they like a variety of products which makes it harder for them to exploit economies of scale
can also the barriers thing as a comparison to perf comp!
are they dynamically efficient
no and your doing great btw and your fiyah xx
how can you argue they might be in the short run
as they make supernormal profits in the short run, they may use this to reinvest which increase dyn eff
