Question

Monopolistic competion is sometimes referred as to as “too many firms producing not enough” explain the statement

Answer 1

In monopolistic competition, there are many firms producing differentiated products. They produce less than socially optimal amount of output. This is because they have market power not as much as a perfect monopoly because there are many firms and not just one firm but they have more power than firms under perfect competition. So, they can charge higher price than under perfect competition to maximise their profits. Demand curve for monopolistically competitive firms is more elastic than monopoly because of easy availability of substitutes but it is not perfectly elastic so they can charge higher prices and produce less output. Thus, it can be said that too many firms producing not enough as there are many firms but they are not producing socially optimal amount of output because of some market power.