3.4.3 - Monopolistic Competition

Question 1

What Is Monopolistic Competition?
(3 Points)

Answer 1

~ Form of imperfect competition.

~ There are many firms offering similar products, but with some differentiation.

~ Better for consumers then monopolies, due to less consumer exploitation.

Question 2

What Are The Characteristics Of Monopolistic Competition?
(7 Points)

Answer 2

~ Many buyers and sellers.

~ Slightly differentiated goods being sold.

~ Firms are price makers, but only slightly, due to many substitutes available, firms have price elastic demand curves.

~ Low barriers to entry and exit.

~ Good information.

~ Lots of non-price competition as, firms can’t really raise their prices.

~ Firms are profit maximisers, producing where MC = MR.

Question 3

Describe How Firms Behave In The SR, Draw It & Explain It
(3 Points)

Answer 3

~ Firms are able to make SNP in the SR.

~ Due to them being price makers and them selling unique goods, they have some market power.

~ SNP doesn’t last in the LR.

Question 4

Why Does SNP Not Last In The LR?
(3 Points)

Answer 4

~ New firms are attracted by the SNP that firms make.

~ As there are low barriers to entry and good information of market conditions.

~ New firms are able to compete in the market, and erode other firms SNP.

Question 5

Describe What Happens In The LR & Explain It
(8 Points)

Answer 5

Theory:
~ As new firms enter the market, demand for individual firms shifts left.

~ As consumers are shared across a large number of new firms.

~ This shift of demand keeps happening until AR = AC, until normal profit is made.

~ Normal profit is then the LR position, as AR = AC.

Diagram Steps:
~ Draw AR and MR.

~ Draw MC.

~ Draw the profit maximisation point.

~ Draw AC, touching AR (Normal profit).

Question 6

Which Efficiencies Are Not Present In Monopolistic Competition In The LR?
(3 Points)

Answer 6

~ AE.

~ PE.

~ DE.

Question 7

Describe How Allocative Efficiency Is Not Achieved In Monopolistic Competition In The LR
(3 Points)

Answer 7

~ P doesn’t equal MC, P > MC.

~ Consumers are being exploited, as price is greater than costs.

~ Choice and output is being restricted.

Question 8

Describe How Productive Efficiency Is Not Achieved In Monopolistic Competition In The LR
(3 Points)

Answer 8

~ Not at the minimum point of the AC curve.

~ Costs are not being minimised, therefore higher prices.

~ Not maximising their EOS.

Question 9

Describe How Dynamic Efficiency Is Not Achieved In Monopolistic Competition In The LR
(3 Points)

Answer 9

~ There is no SNP being achieved in the LR.

~ Not enough profit to be reinvested.

~ There is DE, in the SR.