monopolistic competition

• what is monopolistic competition?

  a market that has aspects from both perfect competition and monopolies
• what are the characteristics ?

  1. many buyers and sellers
  2. slightly differentiated goods
  3. price makers
  4. price elastic demand
  5. low barriers to entry and exit
  6. good information
  7. non price competition
  8. profit max
• what are the short run achievements ?

  • supernormal profit which attract new entrants therefore meaning it does not last leading for normal profit to be generated in long run ( this is because firms entering the market demand for individual firms will shift left until AR=AC
• what happens in the long run for monopolistic competition ?

  the firm will return to a long-run equilibrium position in which they make normal profit

  • This is due to inability to defend against new competitors who enter the market & copy the products of existing sellers
• why do they have a degree of market power?

  • This is due to the fact that they have a differentiated product that is desirable by certain consumers
• short or long run position for monopolistic competition?

  A) short-run position

  
• explain the process to firms shifting from supernormal profit in the short run to normal profit in the long run?

  1. as they make supernormal profit in the short run it becomes attractive to new firms ( incentive )
  2. there are low barriers to entry therefore it is easy for them to join
  3. as supply for firms increase supernormal profit will be eroded and the firms will shift to long run normal profit position
• explain how firms shift from short run loss to long run normal profit position?

  1. if they are preforming at a loss in the short run some will shut down
  2. the shutdown rule could determine that (p=ac)
  3. low barriers to exit therefore firms can easily leave the industry
  4. then for the remaining firms, losses will be eliminated reducing supply of firms and the firm will return to long run normal profit equilibrium position