Monopolistic competition

What are the characteristics of monopolistic competition

Many buyers and sellers

Slightly differentiated good which allows price makers

Firms are price makers, price elastic though

Low barriers to entry/ exit which allows competition

Imperfect information

Non price competition as price elastic demand does not permit price competition as profit diminishes after any price changes so instead they compete through advertising

Firms profit maximise

Draw short run monopolistic diagram

Draw long run monopolistic diagram`

Supernormal profit attracts competition eroding supernormal profit until normal profit

What efficiencies are achieved in short run

No allocative efficiency (Restricted choice and output, price is more than it takes to produce

No productive efficiency

No dynamic efficiency

What is the efficiencies of the long run

None

Evaluate the fact there is no efficiencies

There is competition in the market so price making power is smaller resulting in less price exploitation more consumer surplus - better than a monopoly

Goods are differentiated instead of homogenous (In perfect competition) so consumers may be happy to be pay a bit extra for products that are different from one another

Could be caused by differentiated goods making it harder to exploit economies of scale which consumers do not mind

In a monopoly productive inefficiencies is far worse this is because monopolistically competitive firms cannot afford to charge higher prices and forgo economies of scale because there are alternatives (Competitive)

Monopolistically competitive firms could re invest funds from short run profits resulting in a little dynamic efficiency

Or dynamic efficiency can be achieved on a small scale from reinvestment of normal profit