monopolistic competition

what are the characteristics of monopolistic competition

many buyers and sellers

slightly differentiated goods (firms are price makers, and demand is price elastic)

low barriers to entry/exit

good information

non-price competition

firms are profit maximisers

monopolistic competition in the short run diagram

monopolistic competition in the long run diagram

is there allocative efficiency in the long run

no

what does it mean that there is not allocative efficiency in the long run

consumers are exploited as prices are greater than cost, and output and choice is restricted

is there productive efficiency in the long run

no

why is there not productive efficiency in the long run

firms are voluntarily foregoing economies of scale, therefore costs are higher

is there dynamic efficiency in the long run

no

why is there not dynamic efficiency in the long run

there is no long run supernormal profit being made, so there is not enough profit to be reinvested

why is monopolistic competition not as bad as a monopoly

there is some competition in the market which means the price making ability of firms is lower, and so the price exploitation is lower

why is monopolistic competition not as bad as perfect competition

consumers do not want homogenous goods and therefore are willing to pay more in order to have slightly