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Monopolistic competition (HL) (Economics HL)

IB Economics • Unit 2

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🛍️ Monopolistic Competition

Definition: Monopolistic competition.

Key features

Many firms — each has a small market share.
Differentiated products — firms compete through branding, quality, design, location (NOT identical goods).
Low barriers to entry and exit — new firms can enter when profits are high.
Some price-making power — differentiation means the firm's demand curve is downward-sloping (not flat like in PC).
Non-price competition — advertising, packaging, loyalty programmes, product innovation.

Real-world examples: Restaurants, hairdressers, clothing brands, smartphone apps, coffee shops. Products are similar but not identical — each firm has a niche.

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[{"blocks": [{"text": "📊 MC Equilibrium: SR vs LR", "type": "heading", "level": 2}, {"text": "Short run — just like monopoly", "type": "heading", "level": 3}, {"text": "In the short run, the MC firm behaves like a mini-monopolist. It produces where MC = MR, reads price from its demand curve, and can earn supernormal profit if P > ATC.", "type": "paragraph"}, {"type": "divider"}, {"text": "Long run — entry erodes profits", "type": "heading", "level": 3}, {"type": "styled-list", "color": "green", "items": ["Supernormal profit attracts new entrants (low barriers).", "New firms offer close substitutes → each existing firm loses customers.", "The firm's demand curve shifts left (fewer customers) and becomes more elastic (more substitutes).", "Entry continues until the demand curve is tangent to the ATC curve → only normal profit in the long run.", "At the tangency point: AR = ATC, but P > MC (not allocatively efficient) and not at min ATC (not productively efficient)."]}, {"text": "The LR diagram shows the demand curve just TOUCHING the ATC curve at one point (tangent). The firm earns exactly normal profit. Unlike PC, it does NOT reach min ATC — there is excess capacity (it could produce more cheaply at higher output).", "type": "callout", "variant": "remember"}]}, {"type": "react-component", "component": "MonopolisticCompetitionExplorer"}]

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⚖️ Evaluation: MC vs Perfect Competition

Inefficiencies of monopolistic competition

Allocatively inefficient — P > MC in the long run (firms have some market power).
Productively inefficient — not at minimum ATC due to excess capacity.
Wasteful advertising — resources spent on ads rather than improving products.

Benefits of monopolistic competition

Consumer choice — differentiation gives variety (many restaurant types, not just one).
Innovation — firms compete by improving products, not just cutting prices.
Dynamic efficiency — firms innovate to maintain their edge.
Only normal profit in LR — consumers not exploited as in monopoly.

Excess capacity means firms produce on the downward-sloping part of ATC. Society 'pays' for variety with slightly higher costs — whether this trade-off is worthwhile is a judgment call. For top marks, discuss this trade-off explicitly.

IB Exam Questions on Monopolistic competition (HL)

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How Monopolistic competition (HL) Appears in IB Exams

Examiners use specific command terms when asking about this topic. Here's what to expect:

Give the precise meaning of key terms related to Monopolistic competition (HL).

AO1

Give a detailed account of processes or features in Monopolistic competition (HL).

AO2

Give reasons WHY — cause and effect within Monopolistic competition (HL).

AO3

Weigh strengths AND limitations of approaches in Monopolistic competition (HL).

AO3

Present arguments FOR and AGAINST with a balanced conclusion.

AO3

See the full IB Command Terms guide →

Related Economics HL Topics

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2.1.1The law of demand

2.1.2Determinants of demand

2.1.3Movements vs shifts of demand

2.1.4Linear demand functions (HL)

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