Monopolistic Competition Flashcards
what are the qualities of a monopolistic competition?
- Many firms.
- Imperfect knowledge, but can spot firms making supernormal profit.
- Freedom of entry and exit. Low barriers to entry.
- Similar goods, but with brand differentiation.
Examples include hairdressers and clothing retailers.
Explain short run monopolistic competition
- Firms in monopolistic competition produce differentiated products; they have an inelastic demand curve. This enables them to set a profit, maximising price similar to monopoly.
- The firm maximises profit,where MR = MC. This leads to supernormal profit,because AR > AC.
- They are allocatively inefficient (P>MC) and productively inefficient (not lowest point on AC curve) ,in both the short run and long run.
SHORT RUN GRAPH
Explain long run monopolistic competition
LONG RUN GRAPH
•In the long run, new firms are able to enter the market because there is freedom of entry.
•As new firms enter, the demand curve for the initial firms shifts to the left, until normal profit is made at P
1 (where AR=AC)
.
What are the limitations of the monopolistic competition model?
•Some firms will be better at brand differentiation and
therefore,in the real world, will be able to make supernormal profit. New firms will not be seen as a close substitute.
•There is considerable overlap with oligopoly. The main difference is that the model of monopolistic competition assumes no barriers to entry. In the real world, there are likely to be at least some barrier, even if just through brand loyalty.
Difference between monopoly and monopolistic competition?
In monopoly, there are barriers to entry. In monopolistic competition, there are none. Therefore, in the long run, firms in monopolistic competition will make only normal profit
Difference between perfect competition and monopolistic competition?
In monopolistic competition, firms produce differentiated products and, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.
