Monopolistic Competition | Notes

What are the characteristics of monopolistic competition?

1. low barriers to entry and exit
2. slight product differentiation

Monopolistic competition diagram in the short-run

Efficiencies in the short-run

• not productively efficient because MC≠AC at q1
• not allocatively efficient because AR≠MC at q1

What happens in monopolistic competition in the long-run?

1. since existing firms are making supernormal profit
2. and there are low barriers to entry,
3. new firms enter the market
4. market supply increases
5. each firm's average revene curve shifts to the left as they have a smaller market share

Monopolistic competition diagram in the long-run

Efficiencies in the long-run

• not productively efficient because MC≠AC at q1
• not allocatively efficient because AR≠MC at q1
• contestability
  • since there are low barriers to entry in the market,
  • when existing firms are making supernormal profit in the short-run,
  • new firms will enter the market
  • this means that market supply would increase.
  • this means each firm would have to reduce their prices
  • this means that firms are closer to the point of allocative efficiency
  • price is lower, and closer to marginal cost.
  • consumer surplus increases

Summary questions

1. what are the characteristics of monopolistic competition?
2. monopolistic competition short-run diagram
3. is monopolistic competition efficient in the short-run
4. what happens in monopolistic competition in the long-run?
5. monopolistic competition long-run diagram
6. is monopolistic competition efficient in the long-run