Monopolistic Competition

Question 1

Characteristics of monopolistic market

Answer 1

• many buyers and sellers
• differentiated goods
• good information
• low barriers to entry/exit

Question 2

Graph in short run

Answer 2

supernormal profit

Question 3

Graph in long run

Answer 3

no supernormal profit

Question 4

Which efficiencies do monopolistic firms have or not have?

Answer 4

• productive NO (not lowest point AC)
• allocative NO (price doesn’t equal MC)
• dynamic NO (no profits)

Question 5

Eval - allocative efficiency

Answer 5

• price making ability lower - less exploitation of customers compared to monopoly (not as allocatively inefficient)
• perf comp allocatively efficient but homogenous goods - not ideal/realistic (especially for food/clothes e.t.c)

Question 6

Eval - productive efficiency

Answer 6

• not as bad as monopoly - competitors mean they can’t forgo EOS
• in perf comp not many EOS, there are in monopolistic (possible lower prices)
  ^^ also productive inefficiency may be due to product differentiation demands of consumers

Question 7

Eval - dynamic efficiency

Answer 7

• could be dynamic efficiency in short run (SNP) and monops have potential but aren’t necessarily
• extent of re-investment may be small but evidently apparent as firms need to compete and gain advantage