Monopolistic Competition

• Define Monopolistic Competition

  Is a form of imperfect competition, where many firms offer competing products or services that are similar, but not perfect, substitutes.
• Characteristics of Monopolistic Competition

  • Many buyers and sellers
  • Low barriers of entry and exit.
  • Firms produce differentiated products.
  • All firms are Price makers
  • Imperfect Knowledge
• Why are they price makers?

  Goods are highly differentiated
• What does a price maker mean for the demand curve?

  it is relatively price inelastic
• Close Examples of Monopolistic Competition

  1. Restaurants/Fast Food
  2. Hairdressers
  3. Tv Programmes
• Efficiencies of Monopolistic competition

  • Firms will be allocatively inefficient
  • Firms will be productively inefficient
  • Firms are dynamically efficient
  • Potential for X-inefficiencies.
• Why are firms not allocatively efficient?

  They produce where MC does not equal to AR. Leading to less than what is socially optimal.
• Why are firms not productively efficient?

  Firms don't produce at the minimum point on their AC curve, resulting in higher costs per unit compared to what's achievable with optimal production techniques
• Why can firms in monopolistic competition be dynamically efficient?

  They have profit to invest in research and development.
• Why is there potential for X-inefficiencies?

  Firms face competitive pressures to cut cost and provide better products.
• Diagram for Monopolistic Competition

  In the short-run, firms could make supernormal profits

  In the long-run, firms will make normal profits
• Why do firms make normal profits in the long run?

  New firms can enter the market due to low barriers to entry
• Draw a diagram for monopolistic competition in the short run

  A) Supernormal Profits

  B) MC

  C) AC

  D) D=AR

  E) MR

  F) P1

  G) C1

  
• Where do firms maximise profit?

  Where MR=MC
• What happens in the Long-run for monopolistic competition?

  Firms are making normal profit,

  • Why?

  Demand curve shifts to left

  (because of new firms entering the market from the supernormal profit encouragement)

  Demand gets reduced for EXISTING firms and leads to normal profit.

  A) P1

  B) MC

  C) AC

  D) D=AR

  E) MR

  F) Normal profit