Question

a) Explain how monopolistically competitive producers try to improve on the condition of just breaking even in the long run. Is this improvement a benefit for consumers?

Answer 1

Firms use product differentiation and product improvement as a long run strategy to make their products significantly different from those produced by their rivals. The use of these tactics can make a product unique and tend to make the demand for the product more inelastic.They can also increase the demand for the product, which would increase the firm's profits when costs remain constant or increase at a slower rate than revenues. Product differentiation is achieved through differences in product quality and the introduction of new brands, types , styles and other forms of non-price competition. Product improvement encourages technological innovation and change that makes a product better over time. Consumers will enjoy more choice and variety in the selection of products under monopolistic competition but it also creates more excess capacity and economic inefficiency.