monopolistic competition

what are the characteristics of a monopolistic competition

• relatively large number of sellers

• differentiated products

• easy barriers to entry and exit

• considerable emphasis on advertising brand, names and trademarks

• some control over price

give examples of monopolistic competition

retail and clothing stores

how are products differentiated

• customer service

• location

• brand names and packaging

• loyalty and competition

what is the goal of product differentation and advertising

to make price less of a factor in consumer purchases and make product differences a great factor

what is advertising an example of

non-price competition

why do MC firms advertise their products

to make the product differences clear to customers

why is a MC firm more elastic than a pure monopoly

it has many competitors producing closely-substitutable goods in comparison to a pure monopoly

why is a MC not perfectly elastic like pure competition

it has fewer rivals than pure competition and the products are differentiated so they are not close substitutes

where does MC firm maximise profit in the short run

when MR = MC

where is per-unit profit

P - A

how do you calculate economic profit

(P - A) x Q

what does it mean if a firm faces a loss

price is less than ATC

what happens when the the firm is making economic profit

it will incentivise firms to enter

what happens when the firm is making economic losses

it will cause firms to exit

in the LR, what do firms in a MC industry do

they will enter profitable industries and exit unprofitable industries

what type of profit does a monopolistic competitor earn in the long run

normal profit

what happens if there is economic profit in the LR for MC firms

new rivals will be attracted to the market

what happens when new firms enter the market (LR)

the firm’s demand for that product will decrease, and the firm’s demand curve will shift to the left

what happens in the LR when the industry faces SR losses

• firms will exit

• now faced with fewer substitute products and a greater share of the total demand

• all surviving firms will experience an increase in demand

• demand will shift to the right

• those losses will disappear, resulting in normal profits

when does economic efficiency occur

when the firm produces the output at which P = MC = min. ATC

P = min ATC

productive efficiency

P = MC

allocative efficiency

what does it mean if the firm has productive efficiency

some good is being produced in the least costly way and its price just covers ATC

what does it mean if the firm has allocative efficiency

the right amount of output is being produced and the right amount of scarce resources is being allocated to production

when would allocative efficiency occur

where demand curve D intersects MC

does deadweight loss occur when the firm is allocative efficient

yes

what will total efficiency loss for the industry be

the sum of the individual efficiency losses for each firm

excess capacity

the difference between the minimum-ATC output and the profit-maximsing output

what happens if each monopolistic competitor could produce at the minimum of ATC

this would result in a lower price and fewer firms would be needed to produce the industry firms

what are the benefits of product variety

• variety and differentiation are a benefit for society

• accommodates consumers’ tastes and preferences

• provides consumers with greater choice

• encourages other competitors to improve on their product