Edexcel A Level Economics A:复习笔记3.4.3 Monopolistic Competition

Characteristics of Monopolistic Markets

  • The characteristics of monopolistic competition are as follows
  1. There are a large number of small firms: each one is relatively small and can act independently of the market
  2. There is low barriers to entry & exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition
  3. The products are slightly differentiated: this structure exists as consumers have different desires e.g. two nail bars differentiate their product through express or pampered service. Some consumers want an express service & others want to linger. A relatively homogenous product has now been differentiated
  4. There is a low degree of market power & some price setting ability

Profit Maximising Equilibrium in the Short & Long-run

  • In order to maximise profit, firms in monopolistic competition produce up to the level of output where marginal cost = marginal revenue (MC=MR)
  • The firm does have some market power and is able to influence the price & quantity
    • The firm is a price maker
      • This is due to the fact that they have a differentiated product that is desirable by certain consumers
  • The firm can make supernormal profit in the short-run
  • In the long-run, the firm will return to a long-run equilibrium position in which they make normal profit
    • This is due to inability to defend against new competitors who enter the market & copy the products of existing sellers
    • Firms will attempt to find new ways to differentiate their product to prolong the period of supernormal profit e.g. a barber shop may add in a pool table & beer fridge for their customers to enjoy thus making them different from the competition (for a period of time)

Monopolistic Competition Diagrams

Short-run Profit Maximisation

  • Firms in monopolistic competition are able to make supernormal profit in the short-run
  • The AR curve is the demand curve of the firm & it is downward sloping
    •  The firm has some market power due to the level of product differentiation that exists
      • To sell an additional unit of output, the firm will have to decrease its price
      • The marginal revenue (MR) curve will fall twice as quickly as the AR

3-4-3-supernormal-short-run-profit_edexcel-al-economics

A diagram illustrating a monopolistically competitive firm making supernormal profit in the short-run as the AR > AC at the profit maximisation level of output (Q1)

 

Diagram Analysis

  • The firm produces at the profit maximisation level of output where MC = MR (Q1)
    • At this level the AR (P1) > AC (C1)
    • The firm is making supernormal profit

Short-run Losses

  • Firms in monopolistic competition are able to make losses in the short-run

3-4-3-short-run-losses_edexcel-al-economics

A diagram illustrating a monopolistically competitive firm making losses in the short-run as the AR (PE ) <  AC at the profit maximisation level of output (QE)

 

Diagram Analysis

  • The firm produces at the profit maximisation level of output where MC = MR (QE)
    • At this level of output, the AR (PE) < AC (C1)
    • The firm's loss is

Moving From Short-run Profit/Loss to the Long-run Equilibrium

From Supernormal to Normal Profit

  • If firms in monopolistic competition make supernormal profit in the short-run, new entrants are attracted to the industry & the number of sellers increases
    • They are incentivised by the opportunity to make supernormal profit
    • There are low barriers to entry
      • It is easy to join the industry
  • Supernormal profit will be eroded & the firm will return to the long-run equilibrium position of making normal profit

From Losses to Normal Profit

  • If firms in monopolistic competition make losses in the short-run, some will shut down
    • The shut down rule will determine which firms shut down
    • There are low barriers to exit, so it is easy to leave the industry
  • For the remaining firms, losses will be eliminated & the firm will return to the long-run equilibrium position of making normal profit

3-4-3-from-losses-to-normal-profit_edexcel-al-economics

A diagram illustrating the long-run equilibrium position for a monopolistically competitive firm which is making normal profit. AR (P1) = AC at the profit maximisation level of output (Q1)

 

Diagram Analysis

  • The firm is initially producing at the profit maximisation level of output where MC=MR (Q1)
  • At this level of output P1 = AC & the firm is making normal profit
  • In the long-run, firms in monopolistic competition always make normal profit
    • Firms making a loss leave the industry
    • Firms making supernormal profit see it slowly eradicated as new firms join the industry

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