Which of the following is not a characteristic of a monopolistically c...
The four key characteristics of monopolistic competition are:
(1) large number of small firms,
(2) similar but not identical products sold by the firms,
(3) relative freedom of entry into and exit out of the industry, and
(4) extensive knowledge of prices and technology. hence, Abnormal profits in the longrun is not a chacrterstic.
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Which of the following is not a characteristic of a monopolistically c...
Abnormal profits in the long run is not a characteristic of a monopolistically competitive market.
Monopolistic competition is a market structure that lies between perfect competition and monopoly. It is characterized by a large number of sellers, differentiated products, free entry and exit, and some degree of market power.
Characteristics of monopolistically competitive market:
1. Many Sellers: In a monopolistically competitive market, there are many sellers or firms competing with each other. Each firm has a small market share and is relatively small compared to the overall market.
2. Differentiated Products: Monopolistic competition involves the production and sale of differentiated products. These products are similar but not identical, and firms use product differentiation strategies such as branding, packaging, and advertising to make their products appear unique.
3. Free Entry and Exit: Firms can enter or exit the market freely in the long run. There are no significant barriers to entry or exit, which allows new firms to enter the market if they believe they can make a profit and existing firms to exit if they are experiencing losses.
4. Non-Price Competition: In monopolistically competitive markets, firms engage in non-price competition to differentiate their products and attract customers. This can include advertising, product quality improvements, customer service, and other marketing strategies.
5. Imperfect Knowledge: Buyers and sellers in a monopolistically competitive market have imperfect knowledge about the market conditions. They may not have perfect information about all the available products, prices, and quality, which allows firms to differentiate their products and attract customers.
Why abnormal profits are not a characteristic of a monopolistically competitive market?
Abnormal profits, also known as supernormal profits, refer to profits that are higher than the normal profit level. In a monopolistically competitive market, firms can earn positive economic profits in the short run due to product differentiation and market power. However, in the long run, these abnormal profits will attract new firms to enter the market, leading to increased competition.
In the long run, the following process occurs:
- New firms enter the market attracted by the potential for profits.
- The entry of new firms increases the supply of differentiated products, reducing the market share of existing firms.
- As the market becomes more competitive, firms lose some of their market power and ability to charge higher prices.
- The demand for existing firms' products decreases, leading to a decrease in their profits.
- This process continues until firms in the market are earning normal profits, where total revenue equals total cost.
Therefore, abnormal profits cannot be sustained in the long run in a monopolistically competitive market. The presence of free entry and exit allows new firms to enter and compete, driving down prices and reducing profits to the normal level.
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