Monopolsiitc Comeptiton

Question 1

What is monopolistic competition

Answer 1

Monopolistic competition is a economic model of a market structure which has imperfect competition. The monopolistic competition model equips aspects of both perfect competition and the monopoly model

Question 2

What are the characteristics of monopolistic competition

Answer 2

• large number of small firms so many participants
• differentiated goods which means firms have control over price and therefore downward sloping
• no barriers to entry and exit
• profit maximisers

Question 3

What effects does product differentiation have

Answer 3

-Product differentiation allows firms to build up brand loyalty which gives them control over price and keeps their demand curve downward sloping
- likely firms will take part in heavy advertisement to protect this brand loyalty
- demand curve is quite price elastic as there are many substitutes

Question 4

What does the diagram look like in the short run

Answer 4

• profit maximisers so set output at mc=mr and price where they can clear all output
• downward sloping demand curve
• make supernormal profits

Question 5

What does this snp do

Answer 5

• as there are no barriers to entry, firms are attracted to these supernormal products and join the market but with a slightly differentiated good, e.g Thai restaurant
• this has two effects; makes demand curve more elastic and takes away some customers from other firms which shifts demand curve to the left

Question 6

What effect does this new entry have

Answer 6

This new entry will cause the demand curve to shift to the left until there is no incentive to join the market, meaning only normal profits are being made
- firms may be persuaded to spend money on advertising to defend market shares

Question 7

What is the new market equilibrium

Answer 7

The long run equilibrium is that normal profits are being earnt

Question 8

Is the monopolistic competitor allocatively efficient and what’d ones this mean

Answer 8

• no they are not as price is not equal to mc
• this means that there is consumer exploitation in terms of price and quantity and resources are not following consumer demand and lower consumer surplus

Question 9

How can it be argued that this isn’t a bad thing (allocative efficient)

Answer 9

• in competitive conditions so price is much lower than compared to monopoly
• in perfect competition there is only one homogenous good, consumers do not desire this, they want choice so this allocative inefficiency is not necessarily a bad thing

Question 10

Is monopolistic competition productively efficient

Answer 10

No they are not as they aren’t producing at the lowest point of the ac curve

Question 11

Evaluate monopolistic competition not being productively efficient

Answer 11

-May not be as much economies of scale in perfect comp compared to monopolistic competition
-Productive inefficiency could be because of the product differentiation demand of consumers, so consumers willing to pay a slightly higher price willingly

Question 12

Are they dynamically efficient

Answer 12

If short run profits are enough

Question 13

What is bad about monopolistic competition

Answer 13

If the typical firm in the market is not fully exploiting the possible economies of scale that exist, it could be argued that product differentiation is damaging society’s total welfare, in the sense that it is the product differentiation that allows firms to keep their demand curves downward sloping.