A LEVEL ECONOMICS
NOTES
Evaluate the desirability of monopolistic competition
Point 1: Lower prices
In a monopolistically competitive market structure there are low barriers to entry because there are
many small firms=
In the short-run firms make supernormal profits and charge a price of P1=
(Diagram showing short-run to long-run monopolistic competition)
However, new firms enter the market due to low barriers to entry and therefore steal market share
from incumbent firms in the market=
As a result, AR and MR shift inwards and in order to remain competitive and maintain market share,
incumbent firms have to cut their prices=
NOTES
Evaluate the desirability of monopolistic competition
Point 1: Lower prices
In a monopolistically competitive market structure there are low barriers to entry because there are
many small firms=
In the short-run firms make supernormal profits and charge a price of P1=
(Diagram showing short-run to long-run monopolistic competition)
However, new firms enter the market due to low barriers to entry and therefore steal market share
from incumbent firms in the market=
As a result, AR and MR shift inwards and in order to remain competitive and maintain market share,
incumbent firms have to cut their prices=
