(a) State two characteristics of monopolistic competition.
(b) With the aid of diagram(s), explain why a firm in monopolistic competition is unable to earn abnormal profits in the long run.
(c) Differentiate between natural monopoly and legal monopoly.
Explanation
(a) Characteristics of monopolistic competition:
(i) a relatively large number of buyers and sellers
(ii) differentiated products: (through branding, etc.)
(iii) free entry and exit.
(iv) it has control over the price or output.
(b) in the short-run, a firm in monopolistic competition can earn abnormal profits as illustrated below.
As firms earn abnormal profits in the short run, more firms producing substitute goods will be attracted into the industry. As they do so, the demand facing the individual monopolistic competitor will fall. Demand will continue to fall until normal profit is earned in the long run. Graphically, this is illustrated as follows:
(c) Natural monopoly exists as a result of ownership of rare natural resources. While legal monopoly exists as a result of special privilege or protection given by law to new inventor or producer of literary works. e.g. patent and copy right.