week 7a - monopolistic competition comparison

allocative efficiency

when firms produce at p = mc, allocative efficiency is achieved. Thus, this leads to optimal resource allocation from society’s view.

is achieved in perfect competition

productive efficiency

when firms produce at the lowest cost possible (p = min ATC), it achieves productive efficiency.

is achieved in perfect competition

markup

situation when firms set the prices higher than the marginal cost.

dead weight loss

refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In monopolistic competition, it occurs when prices exceed marginal costs, resulting in reduced consumer surplus.

shows as a triangle between demand curve and marginal cost curve.

what does a dead weight loss represent

the value of trades that could have made buyers and sellers better off, but those trades don’t happen due to higher prices.

monopolistic competition does not achieve allocative efficiency - mark up

mark up = p > mc

indicating that monopolistically, the price set by competitive firms is greater than the marginal cost of production.

thus does not achieve allocative efficiency and there is no deadweight loss

excess capacity

if a firm produces quantity that is less than the quantity at which ATC is a minimum, the firm has excess capacity.

ATC is minimum at Qpc

monopolistic competitive firm produces at Qmc, less than the minimum ATC and has excess capacity.

perfect competition vs monopolistic competition

in the long run, perfect competition will achieve both efficiencies as it produces at the point where p = mc and will be at minimum efficient scale even with a breakeven.

In contrast, monopolistic competition does not achieve these efficiencies due to price mark-ups above marginal costs, dead weight loss, producing quantity less than min ATC (thus excess capacity).