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