Economics Perfect Competition Questions
Monopolistic competition refers to a market structure where there are many firms selling differentiated products that are close substitutes for each other. In the short run, each firm in monopolistic competition has some degree of market power, meaning they can influence the price of their product. However, this market power is limited due to the presence of close substitutes.
In the short run, firms in monopolistic competition can earn economic profits or incur losses. If a firm is earning economic profits, new firms may enter the market, attracted by the potential for high profits. This entry of new firms increases competition and reduces the market share and profitability of existing firms. On the other hand, if a firm is incurring losses, some firms may exit the market, reducing competition and potentially allowing the remaining firms to increase their market share and profitability.
In the short run, firms in monopolistic competition can also engage in non-price competition, such as advertising, product differentiation, and branding, to attract customers and create a perceived uniqueness for their products. This differentiation allows firms to have some control over the price and demand for their products.
Overall, in the short run, monopolistic competition is characterized by firms having some degree of market power, the potential for economic profits or losses, and the ability to engage in non-price competition.