Monopolistic Competition 19th March

Question 1

6 key characteristics of Monopolistic competition

Answer 1

low entry barriers
good information
slightly differentiated products (packaging)
many firms 
no-price competition 
profit maximisers

Question 2

Definition of monopolistic competition

Answer 2

Monopolistic competition is a market structure which combines elements of monopoly and competitive markets

Question 3

Inefficiencies in monopolistic competition

Answer 3

Allocative inefficiency - marginal cost is higher than the price in the short and long run
Productive inefficiency - not producing at the lowest point of AC

Question 4

Efficiencies in monopolistic competition

Answer 4

Dynamic efficiencies - firms may have the profits to invest in R&D
X-efficiency - competition might incentivise firms to cut costs - reduce LRAC

Question 5

Limitations of monopolistic competiton

Answer 5

Brand loyalty might lead to higher price setting power

New firms might not be seen as close substitutes

Question 6

Difference to monopoly

Answer 6

Supernormal profits in the long run because monopolies have barriers to entry and exit

Question 7

Key difference to perfect competition

Answer 7

differentiated products, price takers

Question 8

new trade theory

Answer 8

choice is more important to consumers, country aren’t so different,