Monopolistic competition Flashcards
What are the assumptions of monopolistic competition?
- The industry is made up of a fairly large number of firms
- The firms are small, relative to the size of the industry.
- The firms all produce slightly different products.
- There are no barriers to entry or exit
What can you deduce from the fact the firms are small, relative to the size of the industry?
The actions of one firm are unlikely to affect on any of its competitors.
What is the difference between monopolistic competition and perfect competition in terms of the products sold?
With monopolistic competition the products are not perfect substitutes.
Example of monopolistic competition?
Clothing
How can a firm in monopolistic competition in the short run make profit?
If they produce at MC = MR and AC at that point is less than the selling price of P.
Explain why there is a long run equilibrium with monopolistic competition in which all firms in the industry make normal profits:
When a firm is making abnormal profit, other firms are attracted to the industry and so they join. This takes existing customers away from those making profit, and so their demand curves shift to the left and they make normal profit. When a firm is facing losses, some firms will start to leave and their customers will go to other firms, shifting the demand curve to the right.
What is non-price competition?
When companies try to attract customers by offering special services such as “Happy hour” or “karaoke night” rather than just lowering the price of the good. It is product differentation.
What does this long run equilibrium result in graphically?
Firms produce at MR = MC, at this price output, the cost per unit is equal to the price per unit so the AC curve touches the D curve.
At what point on a graph is allocative efficiency achieved?
Where MC cuts the AR curve.
If AC is lower than the demand curve, where will a firm produce to maximise profit?
At MR = MC rather than the lowest point of AC as although the lowest point of AC is the productively efficient output.
What is the difference between monopolistic competition and perfect competition? (pros and cons)
In perfect competition, in the long run firms produce where profit is maximised, and where is is productively and allocatively efficient. However in the monopolistic competition firms are neither productively nor allocatively efficient despite maximising profit.
