Monopolistic Competition

Question 1

Name the 6 characteristics of a monopolistically competitive market

Answer 1

1. Many buyers and sellers
2. Slightly differentiated goods
3. low barriers of entry/exit
4. good information
5. non-price competition
6. Firms are profit maximisers

Question 2

What does it mean for producers if they have SLIGHLY differentiated goods

Answer 2

There are good substitutes available for others to purchase from, so although they have an elastic demand (price makers) due to having differentiated goods

they do not have a lot of monopoly power

Question 3

3 Examples of monopolistically competitive firms

Answer 3

Taxi markets
Clothing markets
Hairdressers

Question 4

Draw a long-run equilibrium monopolistically competitive

Answer 4

Check Book

Question 5

Draw a short run supernormal profit to long run

Answer 5

Check book

Question 6

Explain the process of short run supernormal profit to long run normal profit

Answer 6

1. in the Short run, firms earn supernormal profit
2. This cannot be maintained in the long run
3. Due to other firms being attracted via supernormal profits and being able to join due to LOW BARRIERS OF ENTRY and GOOD INFORMATION
4. New firms will join (increasing the supply of substitute goods in the market)
5. This lowers the demand (demand curve shifts left) for existing firms
6. This will keep happening until the market is at a normal price (long run equilibrium)

Question 7

Are monopolistic firms Allocative, Productive, or dynamically efficient? (in theory)

Answer 7

NO!

Question 8

Monopolistic VS Perfect Comp (Allocative Efficiency)

Answer 8

Allocative efficiency is achieved in a perfect comp

BUT, that is because they have homogeneous goods

is that really what consumers desire?

maybe they are willing to erode some of their consumer surplus for increased choice in the market.

Question 9

Monopolistic VS Monopoly (Allocative Efficiency)

Answer 9

The inefficiency is not as bad as a monopoly

Because there are many substitutes in the market, monopolistic firms cannot afford to exploit consumers to the same extent as monopolies can.

The price-making ability of Monopolistically Competitive firms is much lower.

Question 10

Monopolistic VS Perfect Comp (Productive Efficiency)

Answer 10

Perfect competition produces at the lowest point of AC, and a monopolistically competitive firm doesn’t.

HOWEVER, in perfect comp, there may not be many economies of scale. But in monopolistically competitive firms, there are.

So, economies of scale are exploited to a greater degree by monopolistic firms

this means that despite not being productively efficient, they may still be producing for a lower average cost.

Question 11

Can Monopolies be dynamically efficient in the real world?

Answer 11

Yes, it can be part of their costs (not counted as supernormal profit)

Firms like clothing brands must constantly innovate their clothes or risk being out of the “trend” and losing demand for their goods.