The latter is also a result of the freedom of entry and exit in the industry. It achieves neither allocative nor productive efficiency. Monopolistic competition is a form of imperfect competition and can be found in many real world markets ranging from clusters of sandwich bars, other fast food shops and coffee stores in a busy town centre to pizza delivery businesses in a city or hairdressers in a local area. Companies in a monopolistic competition make economic profits in the short run, but in the long run, they make zero economic profit. New firms will be attracted to these profit opportunities and will choose to enter the market in the long‐run. All firms in … The difference between the short‐run and the long‐run in a monopolistically competitive market is that in the long‐run new firms can enter the market, which is especially likely if firms are earning positive economic profits in the short‐run. Demand curve shifts to the left due to new firms entering the market.In the long-run, supernormal profit encourages new firms to enter. The demand curve of monopolistic competition is elastic because although the firms are selling differentiated products, many are still close substitutes, so if one firm raises its price too high, many of its customers will switch to products made by other firms. Allocative inefficient. Productive inefficiency. Monopolistic competition is a middle ground between monopoly and perfect competition (a purely theoretical state), and combines elements of each. The above diagram shows a firm not producing on the lowest point of AC curve 3. Monopolistic competition is the economic market model with many sellers selling similar, but not identical, products. tutor2u 110K subscribers Monopolistic Competition - Short Run Analysis This elasticity of demand makes it similar to pure compe… The above diagrams show a price set above marginal cost 2. IEfficiency of firms in monopolistic competition 1. Monopolistic Competition in the Long-run. Companies compete based on product quality, price, and how the product is marketed. Dynamic efficiency. In the long-run, a monopolistically competitive market is inefficient. Also, since a monopolistic competitive firm has power over the market that is similar to a monopoly, its profit maximizing level of production will result in a net loss of consumer and producer surplus. This reduces demand for existing firms and leads to normal profit.
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