Monopolistic competition and economic efficiency (Монополистическая конкуренция и экономическая)

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Now, it is the very time to speak about the monopolistic competition from the point of view of economic efficiency.

The main issue in welfare economics, which describes not how the economy works, but how well it works, is the term of economic or Pareto- efficiency. By definition, “the allocation is Pareto- efficient for a given set of consumer tastes, resources, and technology, if it is impossible to move to another allocation, which would make some people better off and nobody worse off”. To realise the meaning of economic efficiency we must also recall the definitions of allocative and productive efficiencies:

1. Allocative efficiency occurs when price = marginal cost (P=MC), where the right amount of resources are allocated to the product.

2. Productive efficiency occurs when price = average total cost (P= ATC), where production occurs using the least-cost combination of resources.

The monopolistically competitive firm is not allocatively efficient
(misallocate resources as P > MC), but is a productively efficient market structure (P = ATC) as it maximizes profits and minimizes its costs.

As we see on this graph: 1. Price a firm charges its customers exceeds the marginal cost in the long- run, suggesting that society values additional units of output which are not being produced.
2. Firm produces the minimum cost level of output as P = ATC (average-total- cost level of output).

[pic]

There is an obvious difference between the point where MC=MR and the price of a monopolistic competitor (on the graph it is marked as a line from A to B)- its is called a mark up. And the greater is this mark up, the greater is the monopolistic power of a firm. Because the demand curve is still downward sloping, the firm will not reach the long run equilibrium at the minimum point of the ATC curve. Average costs may also be higher than under pure competition, due to advertising and other costs involved in differentiation. If there were fewer firms in industry, each firm could produce the more effective scale of output, which would be better for consumers. This excess capacity is the "price" society must pay for product differentiation. In other words, the price differential paid by the consumer (price difference between perfect competition and monopolistic competition) is the "price" of product differentiation. But of course monopolistic competition provides us many good opportunities important for our wellbeing: the lure of economic profits causes firms to develop new or improve their old products in order to compete for customers with other producers of similar but not identical goods and services.