3.3.3.4 - monopolistic competition

assumptions of monopolistic competition

- large number of firms

- no barriers to entry or exit

- product differentiation/ non-homogenous products

- firms are price MAKERS

types of product differentiation

- physical features, eg. design/functionality

- marketing, eg. advertising, packaging

- distribution, eg. store, online, telephone

profit-maximising equilibrium in the SHORT RUN under monopolistic comp

in the short run, firms can earn supernormal or subnormal profits because there are fewer firms in the market

profit-maximising equilibrium in the LONG RUN under monopolistic comp

they will be unable to earn supernormal profit in the long run because there is freedom of entry to the market, and supernormal profits will entice more firms to enter.

this will increase supply and decrease the price, shifting AR curve down to where it EQUALS AC.

if firms are making subnormal profit, the opposite will happen since there is freedom of exit.

productive & allocative efficiency in the short/long run

under monopolistic comp, firms are neither productively or allocatively efficient in the short run as they are making abnormal profit and therefore unlikely to be producing at lowest possible cost or where P = MC.