Monopolistic Competition

Question 1

Monopolistic Competition resembles a Lot of Real-life industries

Answer 1

• it sometimes called imperfect competition - lies partway along the range of market structures - between perfect competition and monopolies
• In monopolistic competition, the conditions of perfect competition are ‘relaxed’ slightly and instead become:
  a) product differentiation
  b) there are either no barriers to entry or very low barriers to entry
• These relaxed conditions are actually more typical of firms in real life. Behaviour is more predicted in this model may also be more realistic.

Question 2

The Short Run position is like a monopoly

Answer 2

• In monopolistic competition, the barriers to entry and/or product differentiation mean the supernormal profits can be made, but only in the short run.
• look at diagram on page 72

Question 3

But in the long run position is more like perfect competition

Answer 3

1. Unlike in a monopoly, the situation shown by the above diagram doesn’t last into the long run
2. Monopolistic competition, the barriers to entry are fairly low, new entrants join industry => look at graph pg 72 bottom of page

Question 4

Prices in Monopolistic Competition are Higher than in Perfect Competition

Answer 4

1. In the short run position of monopolistic competition is basically the same as in a monopoly. However, in a monopoly, new entrants to the market will drive down prices until only normal profit is achieved or earned in the long run
   Exactly how long this process takes is important - look at page 73
2. Unlike perfect competition firm not producing at the lowest point on the AC curve
   3, 4, 5, 6, 7 all can be seen on page 73

Question 5

Monopolistic competition Doesnt usually lead to Dynamic efficiency

Answer 5

1. The length of time it takes for a new entrants to force all firms in monopolistic competition to only make normal profit is the length of time incumbent firms can make supernormal profits
2. These supernormal profits are reward for risky production investment or product innovation
3. However, the lack of barriers to entry mean that firms are unlikely to invest huge amounts of money on new innovations - less likely to be dynamic efficiency in monopolistically competitive market.
4. In the long run, the absence of supernormal profit will mean there won’t be much money availiable for invesment.