3.4.3 Monopolistic competition

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11 Terms

1
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MONOPOLISTIC COMPETITION- EXAMPLES

  • hairdressers

  • estate agents

  • restaurants

2
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MONOPOLISTIC COMPETITION- CHARACTERISTICS

  • imperfect competition

  • non-homogenous goods

  • large no. of buyers and sellers

  • no barriers to entry and exit

  • price makers

3
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IMPERFECT COMPETITION

  • firms are SR profit maximisers

  • both buyers and sellers have imperfect info

4
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NON-HOMOGENOUS GOODS

  • due to branding- product differentiation

  • but there are a lot of close substitutes

  • makes XED of g and s sold high

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LARGE NO. OF BUYERS AND SELLERS

  • each seller has the same degree of market power as other sellers

  • but market power is relatively weak

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PRICE MAKERS

  • can raise prices without losing all of their customers

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NO BARRIERS TO ENTRY AND EXIT

  • allows new firms to enter when SNP are being made and some to leave in the case of losses

  • so only normal profits can be made in LR

8
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PROFIT MAXIMISING EQUILIBRIUM- SHORT RUN

  • firms profit maximise at the point MC = MR

  • area P1C1AB represents SNP that firms in a monopolistically competitive market earn

<ul><li><p>firms profit maximise at the point MC = MR</p></li><li><p>area P1C1AB represents SNP that firms in a monopolistically competitive market earn</p></li></ul><p></p>
9
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PROFIT MAXIMISING EQUILIBRIUM- LONG RUN

  • new firms enter market- incentivised by SNP

  • makes demand for existing firms’ products more price elastic which shifts AR curve left

  • so only normal profits can be made

  • equilibrium point is P1Q1

  • firms can try and stay in short run by differentiating their products and innovating

  • if question asks u to show change include the OG AR curve

<ul><li><p>new firms enter market- <mark data-color="blue" style="background-color: blue; color: inherit;">incentivised </mark>by <mark data-color="blue" style="background-color: blue; color: inherit;">SNP</mark></p></li><li><p>makes demand for existing firms’ products more price elastic which <mark data-color="blue" style="background-color: blue; color: inherit;">shifts AR curve left</mark></p></li><li><p>so only <mark data-color="blue" style="background-color: blue; color: inherit;">normal </mark>profits can be made</p></li><li><p>equilibrium point is P1Q1</p></li><li><p>firms can try and stay in short run by <mark data-color="blue" style="background-color: blue; color: inherit;">differentiating </mark>their products and innovating</p></li><li><p>if question asks u to show change include the OG AR curve</p></li></ul><p></p>
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ADVANTAGES OF MONOPOLISTICALLY COMPETITIVE MARKETS

  • consumers get a wide variety of choice and firms may be able to enjoy some degree of EoS

  • likely to be dynamically efficient- differentiated products and so know that innovative products will give them an edge over their competitors and enable them to make SNP in the short run

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DISADVANTAGES OF MONOPOLISTICALLY COMPETITIVE MARKETS

  • LR- dynamic efficiency might be limited due to the lack of SNP

  • not be allocatively or productively efficient

  • firms have x-inefficiency, since they have little incentive to minimise their costs