Monopolistic competitive

Question 1

Characteristic(s): Barriers of entry

Answer 1

Low BTE

Question 2

Characteristic(s): Number of firms

Answer 2

Large number of small firms

Question 3

Characteristic(s): Type of product

Answer 3

Differentiated product

Question 4

Characteristic(s): Type of knowledge

Answer 4

Imperfect knowledge

Question 5

Profits in the Short Run

Answer 5

Supernormal, AR > AVC (TC > TVC)

Normal, AR = AVC (TC = TVC)

Subnormal, AR < AVC (TC < TVC)

Question 6

Profits in the Long Run

Answer 6

Normal profits

Question 7

(long run) Earning supernormal profits to normal profits

Answer 7

Entry of new firms → divert some customers away, reduced market share → DD for firm decreases, DD (AR) curve shifts to the left, DD curves becomes more price elastic (more substitutes) → DD curve continue to shift leftwards until it is tangent to LRAC curve → supernormal profits have been competed away

Question 8

(long run) Earning subnormal profits to normal profits

Answer 8

Exit for firms → increased market share → DD for firm increases, DD curve shifts to the right → DD curves becomes less price elastic (less substitutes) → DD curve continue to shift rightwards until it is tangent to LRAC curve → normal profits are earned

Question 9

(LR profits) Difference with perfectly competitive firms

Answer 9

For PC firms (goods are homogenous), the change in profits is due to a change in market SS and DD
For MC firms (goods are differentiated), the change in profits is due to a change in DD of firm

Question 10

Why are MC firms PRODUCTIVE EFFICIENT (firm’s POV)?

Answer 10

likely to produce at a point on the LRAC; unlikely to be X-inefficient

Question 11

Why are MC firms PRODUCTIVE INEFFICIENT (society’s POV)?

Answer 11

will not produce on min point of LRAC when maximising profits

Question 12

Why are MC firms ALLOCATIVE INEFFICIENT?

Answer 12

When producing at output where MC = MR to maximise profit, MPC firms will charge a price higher than MC

Question 13

Why are MC firms DYNAMIC EFFICIENT?

Answer 13

Firms will have incentive to innovate due to high levels of competition due to low BTE

Question 14

Why are MC firms DYNAMIC INEFFICIENT?

Answer 14

Inability to innovate due to LR normal profits because of low BTE

Question 15

Why are MC firms favorable in terms of EQUITY?

Answer 15

Firms make normal profit in the LR due to low BTE and doesn’t worsen inequity

Question 16

Why are MC firms favorable in terms of CONSUMER CHOICE?

Answer 16

Many small firms producing differentiated products - wide range of styles, brands, types, quality etc.