Monopolistic Competition

Question 1

Characteristics

Answer 1

Many buyers and sellers

Free entry and exit

Difference between monopolistic and perfect competition is that goods are not homogenous, so firms do have some price-setting power e.g. Hairdressers, resteraunts

Question 2

Long-Run

Answer 2

Firms can make Normal Profit only, as there are no barriers to entry, new firms will enter the market if abnormal profit is being made until supply increases and price falls.

Question 3

Efficiency of Monopolistic Competition

Answer 3

Not allocative or productively efficient

There may be dynamic efficiency, as firms may be innovative in developing new products, especially in service industries where less capital is required. For instance a restaurant may develop new menus and dishes.

Question 4

Monopolistic Competition Diagram

Answer 4