Monopolistic Competition Flashcards
Real life examples of monopolistic competition
Hairdressers, estate agents, restaurants
characteristics of monopolistic competition
- Large number of buyers and sellers
- No barriers to entry or exit
- Non homogenous goods
- some price setting powers
How does monopolistic competition have some price setting powers
Firms produce differentiated goods or advertising which allows them a degree of price making power
what way does monopolistic competitions demand curve slope
downwards
What happens to the demand curve if the products are less differentiated
It becomes more elastic
Can monopolistic competition firms make supernormal profit
They can due to product differentiation but only in the short run due to low barriers to entry
What will happen to monopolistic competition supernormal profits in the long run
The demand curve (AR) will shift to the left as the demand is split between more firms reducing supernormal profits until it touches the AC curve tangentially as this is when it returns to normal profit
Are Monopolistic competition firms statically efficient
No as they aren’t producing at the lowest point on the AC curve so aren’t productive and are producing above MC = AR so aren’t allocative
How are monopolists competition firms dynamically efficient
The products are differentiated so they can innovate better quality products or production methods
–> Hard to obtain finance to innovate because supernormal profits are only short run and firms are small, risky due to low barriers
Can firms in monopolistic competition exploit economies of scale
Yes because they have some control over price and their goods so can grow
–> Limited because they can’t grow that big due to low barriers to entry, if they grow others will join
why do firms in monopolistic competition have higher AC
They spend more on differentiating their product with advertising mainly to try and create brand loyalty
Why don’t monopolists competition firms experience all the economies of scale they could
They have to profit maximise so they limit output which limits the effect of economies of scale if they limit their growth
