Monopolistic Flashcards
(2 cards)
Characteristics of a Monopolistic Market?
• Large number of buyers and sellers (firms)
• Differentiated products
• Low barriers to entry or exit
• Firms are price makers - they can influence the market price because
products are not identical; demand to the firm slopes downwards to
the right and MR is twice as steep as AR
• Supernormal profit is competed away in the long run
It is important to remember that the emphasis in monopolistic competition is on competition; the low barriers to entry enable firms to join easily and compete in the market
Monopolistic Competition and Efficiency: Allocative, Productive & Dynamic
Allocative efficiency (P>MC): firms are not allocatively efficient in either the short nor the long run
Productive efficiency (min AC): in the long run, the firm is not producing where the AC curve is at its minimum, so firms are not productively efficient
Dynamic efficiency; supernormal profit is competed away in the long run making it more difficult for firms to be dynamically efficient
One benefit to consumers is there is product differentiation – consumers have more choice than in perfect competition; firms are expected to advertise and aim to create brand loyalty (if they succeed the barriers to entry become stronger
