Analyse the level of economic efficiency achieved [short run] in a monopolistically competitive transport market (15 marks)

Start by defining the relevant market (e.g. monopolistic competition). This should follow along the lines of: ‘a market structure where many firms operate providing slightly differentiated goods and services. There are low barriers to entry and exit within this market structure’. It would then be useful to graphically show, using the costs and revenue diagram, what a SHORT RUN monopolistically competitive market looks like, accompanied by accurate annotations and explanation of the key features (e.g. downward sloping demand curve (AR=D), price makers through differentiation, large number of firms in the market, low barriers to entry and exit and firms generally aim to profit maximise (MC=MR (as shown on diagram)). The use of a definition and simple diagram demonstrates to the examiner a clear understanding of a short-run monopolistically competitive market. The use of a diagram above ties in nicely with the following ‘analysis’ of economic efficiency in this market. There are 3 types of economic efficiency you should aim to analyse here: Allocative, Productive and Dynamic. In order to ensure you demonstrate clear and comprehensive analysis of each efficiency, use separate paragraphs and begin each paragraph with a brief definition. For example, ‘[Definition] dynamic efficiency refers to investment in production processes and new technology to increase productivity over time. [Analysis] In the short run, in a monopolistically competitive market, firms aim to profit maximise and hence price at the point where MR=MC (as shown on the diagram), this leads to a supernormal profit (again, as shown in the diagram). These supernormal profits could consequently be reinvested into the firm for product/production innovation (e.g. new more efficient buses) and hence achieve short-run dynamic efficiency. This process should be repeated for all 3 efficiency types.