IB Economics
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Revision Worksheet: Monopolistic Competition
Assumptions
•
Many small firms and many buyers
•
Differentiated product (consumers perceive that there are non-price differences between
competitors products)
•
Few barriers to entry or exit
•
Producers have a degree of control over price; they face a downward sloping demand curve.
Examples of Monopolistic Competition
Typical examples of this type of market structure include hairdressers and curry houses.
Short Run Equilibrium
In the short run firms in monopolistically competitive markets may enjoy abnormal profits
(AR>AC) when producing at the profit maximizing output level (MC = MR).
As with perfect competition because the barriers to entry into the industry are low new firms
are attracted into the industry because of the abnormal profit being made by existing firms.
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Long Run Equilibrium
With new firms entering the industry market supply increases, thus demand for the individual
firm falls. Firms will keep joining the industry until existing firms are only generating normal
profits (AR =AC). The individual firms demand curve (AR) will shift to the left until reaching a
tangent with the AC curve.
Monopolistic Competition and Efficiency
In both the short run and the long run firms in monopolistic competition are neither
productively (MC = AC) nor allocatively (P = MC) efficient.
Question Bank
a) Explain the difference between short-run equilibrium and long run equilibrium in
monopolistic competition [10]
b) “Perfect competition is a more desirable market structure than monopolistic
competition”. Discuss [15]
Other Resources
You Tube video clips revising monopolistic competition:
http://www.youtube.com/watch?v=WRQsug1e4V4
http://www.youtube.com/watch?v=Xlpo4F6MdbM&feature=related
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