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Monopolistic Competition (Features (Nature of product (1) Products are…
Monopolistic Competition
Dynamic Efficiency
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2) However, as they only earn normal profits in the long run, they are unable to carry out prominent R&D.
3) Hence, MC firms only engage in slight product differentiation.
Features
Nature of product
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2) This is due to the normal profit earned in the long run, which prevents prominent product differentiation from taking place.
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Knowledge of Market
1) Imperfect knowledge, as there are numerous firms, each separated by different locations.
2) Hence, there is difficulty in obtaining information about price and quantity of what other shops are selling.
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Economic Efficiency
Allocative Efficiency (P=MC): Achieved when resources are used in such a way that it is impossible to make someone better off without making someone else worse off.
1) MC firms are allocative inefficient (P>MC), as firms are able to set prices and output due to high price-inelasticity in demand.
2) As price is greater than marginal costs, consumers place a higher value on each additional unit of food produced than the cost required to produce it.
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Productive Efficiency : Achieved when all firms produced along their long-run average cost(LRAC) curve at any given output level.
1) MC firms are productive inefficient, as they do not produce at the lowest point of the LRAC due to the presence of the excess capacity.
2) Hence firms are not producing at the socially optimal output and are inefficient in using its resources.
Income Equity
1) MC firms tend to spread opportunities and wealth widely due to free entry of firms and normal profits in the long run.
2) Consumer surplus are retained by consumers and not exploited by firms, as each firm has negligible market power.
Behavior of Firms
1) Firms are price setters, as their products are slightly differentiated.
2) MC firms conduct business strategies independently as each firm controls an insignificant market share.
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4) Due to normal profits in the long run, only slight product differentiation is carried out.
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