Monopolistic competition

Question 1

Key characteristics of a Monopoly

Answer 1

-High barriers to entry
-Dominant firm
-High market share of 1 firm
-Price makers
-Imperfect knowledge

Question 2

Monopolistic competition

Answer 2

A market structure where a large number of small firms produce differentiated products and where there are low barriers to entry and exit e.g. coffee shops

Question 3

Key characteristics of monopolistic competition

Answer 3

-A large numbers of buyers and sellers acting independently
-Perfect knowledge
-Firms which act as profit maximisers in that SR
-Low barriers to entry and exit

Question 4

Product differentiation in monopolistic competition

Answer 4

-This allows firms to charge a different price based on any unique qualities of their service
-Therefore they are price makers with a downwards sloping demand curve
-There are many competitors and close subs so market power is weak
-This means the PED is relatively elastic, however if a firm can increase brand loyalty, PED becomes less elastic and market power increases

Question 5

Allocative efficiency theory

Answer 5

Dont operate at MC=AR so no allocative efficiency

Question 6

Allocative efficiency in practice

Answer 6

Its about producing what consumers actually want to buy - this can be achieved through product differentiation.

Question 7

Dynamic efficiency in theory

Answer 7

In LR there is no supernormal profit and so no finance for R&D and innovation.

Question 8

Dynamic efficiency in practice

Answer 8

Firms differentiate their products so there must be some dynamic efficiency. Can be financed e.g. borrowing

Question 9

Productive efficiency in theory

Answer 9

Firms dont operate at the lowest average cost

Question 10

Productive efficiency in practice

Answer 10

Firms can face fierce competition so are incentivised to keep costs and prices as low as possible