Monopolistic Competition

Question 1

Characteristics of Monopolistic Competition

Answer 1

• Also known as Imperfect Competition
• Unlimited number of buyers and sellers in the market (many firms)
• No barriers to entry or exit (free entry)
• Differentiated goods - non-price competition is anything that firms do to try and make their goods stand out from others
• Varying degrees of market power - firm has some (small) price making ability, but there is less market power due to many substitutes

Examples:
Electronics companies
Candy
Hair salons
Restaurants and bakeries

Question 2

Demand Curve

Answer 2

Generally elastic

Question 3

Short Run

Answer 3

• Can have both abnormal profit and loss made in short run
• Abnormal profit induce entry as it is assumed that there are no barriers to entry

Question 4

Abnormal profit diagram (short run)

Answer 4

Question 5

Loss diagram (short run)

Answer 5

Question 6

Long Run

Answer 6

• The long run is a period long enough for new firms to enter into the market.
• If potential firms see that profit is being earned they will attempt to enter the market.
• Compete by bidding down the price. Price will continue to fall until firms are operating at breakeven point
• Unable to make abnormal profit

Question 7

What should be on the graph for Long run?

Answer 7

On your graph, indicate:

• Where a profit maximising firm will set output i.e. MR = MC (Q)
• Where a profit maximising firm will set price (P)
• The total revenue earned by the firm (PxQ)
• The profit earned by the firm (zero)

Question 8

Efficiency

Answer 8

Not productively or allocatively efficient

Question 9

Productive/Technical efficiency

Answer 9

Arises when firms pursue the least cost method of production and produce at minimum average cost (MC = AC)

Question 10

Allocative/Economic efficiency

Answer 10

Arises when firms allocate resources into the production of goods desired by consumers (AR = P = MC)

Question 11

Efficiency in short run (diagram)

Answer 11

Question 12

Efficiency in long run (diagram)

Answer 12