Why is monopolistic competition productively inefficient?
A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market is productively inefficient market structure because marginal cost is less than price in the long run.
Where is productive efficiency in monopolistic competition?
1. Productive efficiency: occurs where P= min ATC. Monopolistic competitive firms will not achieve productive efficiency as firms will produce at an output which is less than the output of min ATC. Product differentiation is the major cause of excess capacity.
What are the sources of inefficiency in monopolistic competition?
There are two sources of inefficiency in monopolistic competition. First, dead weight loss due to monopoly power: price is higher than marginal cost. Second, excess capacity: the equilibrium quantity is smaller than the lowest cost quantity at the minimum point on the average cost curve.
Is monopolistic competition productively efficient in the short run?
A monopolistically competitive industry does not display productive and allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.
What is a normal profit?
Normal profit is a profit metric that takes into consideration both explicit and implicit costs. It may be viewed in conjunction with economic profit. Normal profit occurs when the difference between a company’s total revenue and combined explicit and implicit costs are equal to zero.
Are oligopolies productively efficient?
Productive and Allocative Efficiency of Oligopolies Pure competition achieves productive efficiency by producing products at the minimum average total cost. However, because oligopolies produce only until marginal cost = marginal revenue, they lack both the productive and allocative efficiency of pure competition.
How is normal profit calculated?
Why are monopolies often regarded as being inefficient?
On evaluation, a monopoly can often various advantages but they can be only enjoyed by the large firm who owes the biggest market power. On the other hand, it is often regarded as being inefficient since there is no competition or any incentives for a new firm to enter the market.
What are the disadvantages of monopolistic competition?
The biggest disadvantage of monopolistic competition is that due to differentiated products chances are companies may charge more than fair price from the consumers for extra features in product because unlike perfect competition where there is no scope for companies to charge higher price as companies sell homogeneous products.
Why is perfect competition better than a monopoly?
Another reason why perfect competition is more efficient than a monopoly is due to externalities. In perfect competition society’s costs where AC=MC is equated with society’s benefits where AR=MR. In perfect competition the each firm produces the socially efficient level of output.
Why does excess capacity exist in monopolistic competition?
Excess capacity is a characteristic of natural monopoly or monopolistic competition. It may arise because as demand increases, firms have to invest and expand capacity in lumpy or indivisible portions. Firms may also choose to maintain excess capacity as a part of a deliberate strategy to deter or prevent entry of new firms.