Types of markets - Monopolistic competition Flashcards
Define monopolistic competition
These are very competitive markets, where each firm is producing a slightly different product.
What are the 4 assumptions of monopolistic competition?
1- Lots of small firms in the market
2 - Each firm produced as slightly different product - product differentiation
3 - All firms are trying to maximise their profits
4 - No barriers to entry to the industry
What is the significance of their being lots of small firms in the market? (Monopolistic competition)
Consumers have lots of choice and no individual firm will babe and control over the market
At what point will a firm produce up to when trying to profit maximise?
Where MC = MR
What follows from the 4 assumptions of monopolistic competition?
It follows from these assumptions that each firm will face it own, unique downwards facing demand curve, the price will be greater than the MR, because they have to sell at a lower price to increase demand, and they will get the price from the demand curve, and produce at MR=MC
Describe elasticity in reference to monopolistic competition
Because firms face so much competition, and all the products are very similar, we would expect the demand for their product to be fairly price elastic.
NOTE - Because each firm faces its own demand curve there’s no distinction between the firm and the market as there is in perfect competition - i.e. only one diagram for the firm.
What level of profit can firms earn in monopolistic competition?
In the short term, firms under monopolistic competition can earn any level of profit, depending upon the relationship between their revenues and their costs.
What are the advantages of monopolistic competition?
1 - Some element of real choice - since not every product is exactly the same
2 - Firms can be closer to dynamic efficiency
3 - There will be enough commotion in the market for them to get fairly close to allocative or productive efficiency
4 - More realistic
What is dynamic efficiency?
Constant improvement of a product
what are the disadvantages of monopolistic efficiency?
1 - Cannot feature either allocative or productive efficiency
2 - Prices are likely to be higher compared to perfect competition, because they are not under as much pressure to keep their costs and prices low. They also have incentive to invest in advertising to build up there brand, increasing their costs, therefore increasing their prices
3 - Cannot benefit from economies of scale
