Monopolistic Competition and Inadequate Demand for Factors of Production

In monopolistic competition a possible cause of inadequate demand for labor and underutilized production capacity is the presence of a small number of firms in the market in the short run. Because of the possession of market... [ view full abstract ]

In monopolistic competition a possible cause of inadequate demand for labor and underutilized production capacity is the presence of a small number of firms in the market in the short run. Because of the possession of market power by firms, total equilibrium output may be insufficient to utilize all the available labor, driving equilibrium wages to the reservation wage.  The economy inefficiently operates inside its production possibilities frontier.  In the long run a self-balancing mechanism is the free entry of firms.  In the short run a government-imposed increase in real wages and expansionary fiscal policies may cause a weak Pareto-improvement. (This work has been partly supported by the University of Piraeus Research Center).