| Where does Monopolistic Competition find itself in the Spectrum of Market Structures? | -Also called Imperfect Competition, it lies between Perfect Competition and Pure Monopoly.
-This Model is the Most Realistic. |
| Which Conditions are Relaxed in a Monopolistic Competition Structure? | -Product Differentiation can exist because of Advertising and/or Real Differences between Products. This allows some Price Making Power, having the Demand Curve go Downwards. The Difference between the Documents reflects how Price Elastic as well
-No Barriers, or only Low Barriers to Entry. If Supernormal Profit existed, then New Firms can Join in easily |
| In a Monopolistic Competition Structure, how can the Short Run act as a Monopoly? | -Barriers to Entry and Product Differentiation can allow Supernormal Profits to Develop. This is only in the Short Run though
-The Only Difference between Monopolies and this is that the Demand Curve for Monopolistic Competition is more Elastic |
| In a Monopolistic Competition Structure, how can the Long Run act as Perfect Competition?
-Is there Static Efficiency? | -If Supernormal Profit is being made, new Firms, thanks to the Low Barriers, can enter and make the Demand Curve shift to the Left since the Market Demand is Split between more Firms.
-New Firms will enter until Normal profit is Earned. This will happen when the Price = AR = AC.
-Allocative Efficiency is not Achieved, as MC is far Below the Price, and Productive Efficiency is not Achieved, as the Firm can still go Further Down the AC Curve |
| Why does the Process of Supernormal Profit --> Normal Profit Important in a Monopolistic Competition Industry?
-What can this lead to? | -If it takes a Long Time, then the Market is looking like a Monopoly
-If it takes a Short Time, then it looks like a Perfectly Competition
-Firms spend Lots of Money to Differentiate their Profit (Improving or Brand Image) in order to Keep their Price-Making Power and a Supernormal Profit |
| Why can Prices be Higher in a Monopolistic Industry than a Perfect Competition Industry? | -The Monopolistic Firm is not Producing on the AC lowest Point, so it can lead to Higher Prices being Charged
-This is because the Monopolistic Firm needs to Differentiate their Product and have Advertising
-Monopolistic Firms also Restrict Output to Max Profit. Economies of Scale do not Benefit them as much |
| Why can Dynamic Efficiency not be Achieved in a Monopolistic Competition? | -The Amount of Time the New Firms force All Firms in a Monopolistic Market to make Normal Profit = Time for Firms already in the Market to make a Supernormal Profit
-Supernormal Profit provide as a Reward for Investing or Innovation
-Lack of Barriers however means the Firms are not Likely to Invest Lots onto New Innovations, so Less Dynamic Efficiency
-In the Long Run, there will not be a Lot of Money left for Investment |
