Monopolistic Competition

    Cards (56)

    • What is monopolistic competition?

      A market structure that combines characteristics of both competition and monopoly
    • What is a key characteristic of a competitive market?

      There are many buyers and sellers
    • How are goods in monopolistic competition described?

      They are slightly differentiated
    • What power do firms have in monopolistic competition regarding pricing?

      Firms are price makers but only slightly
    • Why can't firms significantly raise prices in monopolistic competition?

      Because there are many good substitutes available
    • What type of demand curves do firms in monopolistic competition face?

      Price elastic demand curves
    • What is a characteristic of barriers to entry in monopolistic competition?

      There are low barriers to entry and exit
    • What type of competition is prevalent in monopolistic competition?

      Non-price competition
    • What is an example of a monopolistically competitive market?

      Clothing markets
    • How do firms behave in the short run in monopolistic competition?

      They behave similarly to monopolies
    • What is the relationship between average revenue and average cost in the short run for firms in monopolistic competition?

      Average revenue is greater than average cost, leading to supernormal profit
    • What happens to supernormal profits in the long run in monopolistic competition?

      They are eroded as new firms enter the market
    • What causes the demand curve for individual firms to shift in the long run?

      New firms entering the market
    • What is the long-run equilibrium condition for firms in monopolistic competition?

      Average revenue equals average cost, resulting in normal profit
    • What is the implication of price being greater than marginal cost in monopolistic competition?

      Allocative efficiency is not achieved
    • What does productive efficiency refer to in monopolistic competition?

      Producing at the minimum point of the average cost curve
    • What is dynamic efficiency in the context of monopolistic competition?

      The ability to reinvest profits into the company for innovation
    • How does monopolistic competition compare to perfect competition in terms of efficiency?

      Monopolistic competition is less efficient than perfect competition
    • What is a potential benefit of product differentiation in monopolistic competition?

      Consumers may prefer variety over homogeneity
    • What might lead to dynamic efficiency in monopolistic competition?
      Short-run supernormal profits can be reinvested
    • How does the desire for variety affect economies of scale in monopolistic competition?
      It makes it harder to exploit economies of scale
    • What is the overall evaluation of monopolistic competition in terms of market structure?
      It is often seen as inefficient compared to perfect competition and monopoly
    • What is the significance of good substitutes in monopolistic competition?
      They limit the extent of price exploitation by firms
    • How does the presence of many firms affect pricing in monopolistic competition?

      It prevents firms from raising prices significantly
    • What is the role of advertising in monopolistic competition?

      It is a form of non-price competition
    • What happens to the average cost curve in the long run as new firms enter the market?

      The average cost curve shifts until it touches the average revenue curve
    • What is the impact of consumer preferences on monopolistic competition?

      They drive firms to differentiate their products
    • How does the theory of monopolistic competition evaluate the market structure?

      It suggests that monopolistic competition is inefficient
    • What is the significance of the downward sloping revenue curves in monopolistic competition?

      They indicate that firms can set prices above marginal cost
    • What is the relationship between short-run and long-run profits in monopolistic competition?

      Short-run profits attract new firms, leading to normal profits in the long run
    • What is the effect of competition on the pricing power of firms in monopolistic competition?
      It reduces the pricing power of firms
    • How does the entry of new firms affect existing firms in monopolistic competition?
      It decreases demand for existing firms' products
    • What is the implication of firms being profit maximizers in monopolistic competition?
      They produce where marginal cost equals marginal revenue
    • What is the significance of the average cost curve in determining long-run profits?
      It helps identify whether firms are making normal or supernormal profits
    • How does the concept of consumer surplus relate to monopolistic competition?
      Consumer surplus may be reduced due to higher prices
    • What is the role of market information in monopolistic competition?

      It allows firms to make informed decisions about entry and pricing
    • How does the presence of many firms influence the market dynamics in monopolistic competition?

      It creates a competitive environment that limits price increases
    • What is the significance of the downward sloping demand curve in monopolistic competition?

      It indicates that firms can influence prices through their output decisions
    • How does the concept of economies of scale apply to monopolistic competition?

      Firms may not fully exploit economies of scale due to product differentiation
    • What is the impact of product differentiation on pricing in monopolistic competition?

      It allows firms to charge higher prices than in perfect competition