Monopolistic competition

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  • Productive efficiency is achieved when goods are produced at the lowest possible cost per unit (minimum average cost)With that said, productive efficiency is not achieved because AC is not at its minimum in neither the short run nor long run. However, the good thing about this is that consumers are given more choices. For example, you can pay 100 yen for only McDonald’s and achieve productive efficiency, or you can pay 120 yen for a choice of McDonalds, Wendy’s, or Burger King. Furthermore, the costs that may be higher than free competition (which doesn’t exist in the real world) are usually lower than those in a typical monopoly.
  • Allocative Efficiency is achieved when resources are not wasted i.e. Supply = Demand and Price = MCAllocative efficiency occurs when the value consumers put on the good or service equals the cost of producing the product or service. In other words, when price = marginal cost.In a monopolistic competition, the price is higher than the marginal cost, so it is allocative inefficient. However, as with the productive efficiency, the price is still lower than those in a monopolistic market, and the higher price allows for greater diversity in products.
  • As with other market structures, profits are maximized in monopolistic competition where MC = MR. The AR and MR curves are more elastic than for a monopolist as there are more substitutes available. The profits depend on the strength of demand, the position and elasticity of the demand curve. In the short run therefore firms may be able to make supernormal profits. This situation is shown in the diagram below.In the long run firms will enter the industry attracted by the supernormal profits. This will mean that demand for the product of each firm will fall and the AR (demand curve) will shift to the left. Long run equilibrium occurs where only normal profits are being made as new firms will keep entering as long as there are supernormal profits to be made. In equilibrium, the demand curve (AR) will be tangential to the firm's long run average cost curve as shown in the diagram below.
  • Monopolistic competition

    1. 1. Will Congleton<br />Bryan Ito<br />Hannah Phillips<br /> Monopolistic Competition<br />
    2. 2. What is Monopolistic Competition?<br />2<br />
    3. 3. 3<br />
    4. 4. 4<br />
    5. 5. 5<br />Productive Efficiency<br />
    6. 6. 6<br />Allocative Efficiency<br />
    7. 7. 7<br />Figures<br />
    8. 8. Examples<br />Hair Dressers<br />Family Restaurants<br />Petrol Stations<br />8<br />
    9. 9. 9<br />
    10. 10. 10<br />

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