4.3- monopolistic competition

• Monopolistic competition


  Where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogenous goods.
• What is monopolistic competition?

  Market structure in the middle of perfect competition and monopoly.

  Shares characteristics with monopoly and perfect competition
• Is monopolistic competition productively efficient?

  No

  A firm wouldn‘t operate wher AC = MC in the short or long run
• is monopolistic competition allocatively efficient?

  No

  Doesn’t operate where Price = MC in the long or short run
• Is monopolistic competition X-efficient?

  Not in the short run as it doesn’t have to operate on the AC curve.

  Yes in the long run as they will have to work on the AC curve
• Is monopolistic competition dynamically efficient?

  No as there are no supernormal profits in the long run
• What are advantages of monopolistic competition?

  Greater consumer choice than a monopoly

  • due to differentiation

  Incentive to innovate

  Greater competition

  • due to low barriers to entry

  Product service and quality
• what are disadvantages with monopolistic competition?

  Lack of economies of scale

  • leading to higher prices

  X-inefficient

  • excessive advertising may be seen as a waste

  Not productively or allocatively efficient in the short or long run

  • don’t produce enough output to reduce LRAC and don’t produce at an output where price equals marginal cost

  Higher prices may be charged than under perfect competiton
• What is the difference between monopolistic competition and monopoly/oligopoly?

  Barriers to entry

  In the long run firms in monopolistic competition onky make normal profits
• what is the difference between monopolistic competition and perfect competition?

  In monopolistic competition firms produce differentiated products and so have inelastic demand while perfect competition has a perfectly elastic demand curve
• Characteristics of monopolistic competition

  Many firms

  Differentiated products

  Few barriers to entry and exit

  Price make (downward sloping demand curve)

  Profit maximiser

  Heavy expenditure on advertising and branding

  no dominant firm
• Diagram illustrating equilibrium price and output for a firm in short run monopolistic competition

  
• Diagram illustrating equilibrium price and output for a firm in long run monopolistic competition

  
• Productive efficiency under monopolistic competiton

  productive efficiency is to operate at the lowest average cost and the point where MC intersects the AC curve

  Not productively efficient

  • Saturation of the market may lead to businesses being unable to fully exploit economies pof scale
  • causing average cost to be higher
• Allocative efficiency under monopolistic competition

  Concerns the optimal distribution of resources. when price is equal to marginal cost

  Not productively efficient

  • prices are above marginal cost