Thursday, November 6, 2014

Monopolistic Competition

Monopolistic Competition

Assumptions
  • many buyers and sellers
  • heterogeneous/differentiated goods: (packaging, branding, after-sales service)
  • low degree of price setting
  • low barriers for entry and exit
  • imperfect information
Monopolistic Competition, video - mjmfoodie
Revenue Curves
  • Downward sloping demand curve
  • Relatively, but not perfectly elastic, demand curve
  • MR curve below Demand for same reason as monopoly
Profit Max in Short-run
  • Firm produces at profit max
  • Profits/losses possible in the short-run
Long-Run
  • Entry/exit in the long-run will eliminated profits/losses
  • Break-even only happens in the Long-run (like Perfect Competition)
Non-Price Competition
  • Branding - development of recognizable brand in an attempt to develop brand loyalty
  • Product Development - continuous improvement
  • Customer Service - good service increases demand
  • Location - convenient location increases demand
  • Advertising - makes buyers aware of products
Efficiency
  • Allocative Efficiency - (P = MC)
  • Productively Efficient - (P = minATC)
  • Monopolistic Competition neither achieves Allocative or Productive Efficiency
Monopolistic Competition compared to Perfect Competition
P (is higher)
Q (is lower)
Consumer Surplus (is less)
Allocative and Productive Efficiency (not achieved)
Product (differentiated)

Welker - Monopolistic Competition - Video

(Monopolistic Competition FRQ's 2009, 2007, 2004)

2009 AP Microeconomics Exam FRQ, Q1

























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