Monopolistic competition 3.4.3

What’s the key feature of monopolistic competition

Product differentiation, firms sell different products that have unique characteristics but are close substitutes

What are the other features of monopolistic competition

Many small buyers and sellers, low barriers entry and exit, high XED, price makers, product differentiation

Why is monopolistic competition more realistic

Because products are different whereas in perfect competition goods are homogeneous.

What are some features of differentiated products

Product quality, product performance, branding, functionality, quality of after sales service

What are examples of monopolistic competition markets

Artisan bakeries, hairdressers/barbers, pubs, takeaway, dry cleaners, craft beer manufacturers

What’s the condition for profit maximisation

MC=MR

In the short run what do firms enjoy in monopolistic competition

Supernormal profits

In the long run what do firms enjoy in monopolistic competition

Normal profit

Explain what happens when a monopolistically competitive market moves into the long run

In the short run firms can earn supernormal profits, due to no or low barriers to entry this means that firms outside the market will join this causes demand to decrease for original firm due to high XED/ substitute, this reduction in demand will cause AR and MR to shift down to touch AC so only normal profit can be made in the long run and firms won’t enter the market as spn can’t be made

In the long run what efficiency do they have

Productive and allocative inefficient, the firm isn’t operating at lowest cost per unit and not operating to maximise welfare