Unit 3: Monopolistic Competition

Question 1

What are the Similarities between Monopolistic Competition and Perfect Competition?

Answer 1

High Competition
Low Barriers to Entry
High Knowledge of Prices
Many Buyers + Sellers

Question 2

What are the Differences between Monopolistic Competition and Perfect Competition?

Answer 2

MC are price makers, PC are price takers

MC has a downwards sloping demand curve, PC has an elastic curve

MC has slightly differentiated goods, PC has homogenous goods

Question 3

What is Product Differentiation?

Answer 3

The process of distinguishing a product or service from others, to make it more attractive to a target market

Question 4

What is Monopolistic Competition like in the Short Run?

Answer 4

Firms make Abnormal Profit, or Loss

Question 5

What is Monopolistic Competition like in the Long Run?

Answer 5

Firms make Normal Profit

Question 6

What are some Examples of Monopolistic Competition?

Answer 6

Restaurant business.
Hotels
Pubs

Question 7

How does a Supernormal Profit making firm in a Monopolistic Competition go to Normal Profit in the Long Run?

Answer 7

In the long run, supernormal profits will be eroded because new firms will enter the market owing to lack of barriers to entry.

The entry of new firms will increase supply, shifting the average revenue curve downwards to the point where AR=AC, as in the diagram.

Question 8

How does a Loss making firm in a Monopolistic Competition go to Normal Profit in the Long Run?

Answer 8

If the firm was making a loss, it would leave
the industry, reducing supply and shifting the AR curve upwards again to a
point where AR=AC

Question 9

What does a Monopolistic Competition Diagram look like?

Answer 9

Short Run: https://s3-eu-west-1.amazonaws.com/tutor2u-media/subjects/economics/monopolistic_competition_short_run.png

Long Run: https://s3-eu-west-1.amazonaws.com/tutor2u-media/subjects/economics/monopolistic_competition_long_run.png