Monopolistic Competition

820 WordsNov 18, 20104 Pages
Monopolistic Competition and Efficiency Recall that: • productive efficiency is P= min ATC • Allocative efficiency is P= MC I. A monopolistic competition industry has neither productive nor allocative efficiency A. Marginal revenue curve will never coincide with D=AR=P • in monopolistically competitive market, Demand is relatively elastic. Products are somewhat substitutable. B. Firms produce at a point where P>MC, meaning that resources are underallocated; not allocatively efficient C. Firms do not produce where P= min ATC; therefore, no productively efficient D. In the long run, MC industries will only earn a normal profit. P= ATC (but not minimum ATC!) E. This is also caused by relative ease of entry and exit o When…show more content…
• The firms in monopolistic competition will DIFFERENTIATE their products and make them more appealing to the customers in order to maximize their profits. Easy Entry and Exit: • In the SHORT RUN, a firm may obtain economic profits or losses. • However, since there are little barriers from preventing companies to enter or leave the industry, in the long run, the firms will only obtain normal profits • Remember: entry eliminates profits; exit eliminates losses! Advertising: • A unique feature of a monopolistic competitive market is that there are product differentiations. • Therefore, companies rely on advertising to flaunt their products and try to get consumers to buy their product over another. • Goal of product differentiation and advertising (non price competition) is to make price less of a factor in consumer purchases and make product differences a greater factor. • A successful advertisement would shift the firm's demand curve to the right and make demand more inelastic. • Some examples of non-price competition o store loyalty cards o Banking and other financial services o Home delivery systems o Child services o Extension of opening hours o Internet shopping for customers o Warranties Monopolistic Competitive Industries: • Shoes
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