Monopolistic Competition Flashcards
(20 cards)
What are the characteristics of Monopolistic Competition?
- Many buyers and sellers
- Slightly Differentiated Goods
- A degree of price making is present
- Non-Price Competition
- Good Information Available
- Firms are Profit Maximisers
Describe the Revenue Curves of Monopolisitic Competition
They are downward sloping as firms in this market structure have a degree of price making power
Why do firms in Monopolistic Competition lack full price making abilities?
Consumers percieve non-price differences, such as quality, amongst goods in the market
What profits are made in Monopolistic Competition?
Supernormal Profits in the Short Run
Normal Profits in the Long run
Why can’t supernormal profits persist in the long run?
The low barriers to entry and availability of information encourage competition to enter the market and copy success, which increases supply in the long run, driving prices down
How might firms in Monopolistic Competition compete beyond price?
- Brand awareness
- Loyalty schemes
- Quality improvements
Why is Monopolistic Competition Inefficient in Theory?
- Price is not equal to Marginal Cost
- Firms do not produce at the lowest point of their AC curve
- The absence of LR SNP discourages investment
How might Monopolistic Competition Compare with a Monopoly in terms of Allocative Efficiency?
Price exploitation powers are not very extreme given the amount of competition, hence, it can be argued consumers are not heavily exploited
How might Monopolistic Competition Compare with Perfect Comeptition in terms of Allocative Efficiency?
Homogenous goods in Perfect Competition may not be socially desireable by all consumers in reality, therefore, consumers may be willing to sacrifice some consumer surplus at higher prices for differentiated goods
How might Monopolistic Competition Compare with a Monopoly in terms of Productive Efficiency?
Firms cannot afford to forego economies of scale to the extent of monopolies as keeping costs low could be a part of being competitive
How might Monopolistic Competition Compare with Perfect Competition in terms of Productive Efficiency?
The MC curve in Perfect Competition is higher than a concentrated firm, it can be argued that economies of scale benefits is higher in Monopolistic Competition
How could lower economies of scale be justified in Monopolistic Competition?
Changes in consumer demand, given the variety and differentiation in products, it can be difficult to achieve high economies of scale on all lines of production
How might Monopolistic Competition Compare with a Monopoly in terms of Dynamic Efficiency?
The argument that monopolies may not always use profits to reinvest in advancements, while in monopolistic competition, innovation may be required to stay ahead of rivals, hence it may exist to an extent.
How might Monopolistic Competition Compare with Perfect Competition in terms of Dynamic Efficiency?
Investment is a part of competition and staying ahead of rivals, given the differentiated goods, monopolistic competition could fall behind without innovations and improvements.
The extent may be small, but the investment of normal profits may be more than perfectly competitive firms.
Why are Average Costs higher in Monopolistic Competition compared to other competitve markets?
Due to non-price competition and excess capacity by not producing at the most efficient scale
What are the advantages of Monopolistic Competition?
- Variety of Goods
- Innovation
What are the disadvantages of Monopolistic Competition?
- Inefficiency
- Excess capacity in production
- Wastage of resources
- Creative Destruction
- Cost-cutting in dangerous areas
What is Creative Destruction
When firms creatively enter the market with new products and lower costs, they destory incumbent firms by replacing old products, which can price out firms from the market and create unemployment
How might Creative Destruction be justified?
- By driving innovation and reallocating resources from less productive markets to more efficient ones.
- Long term economic growth and development
- Raising Living Standards through innovation, affordability
- Unemployment can be mitigated through transfer of workers to other productive areas
Who coined the term Creative Destruction?
Joseph Schumpeter, Austrian Economist
