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Economics A-Level Edexcel (A)
Market Structures
Monopolistic Competition
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Cards (56)
What is
monopolistic competition
?
A market structure that combines characteristics of both competition and
monopoly
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What is a key
characteristic
of a
competitive market
?
There are many
buyers and sellers
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How are goods in
monopolistic competition
described?
They are slightly
differentiated
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What power do
firms
have in
monopolistic competition
regarding pricing?
Firms are
price makers
but only slightly
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Why can't firms significantly raise prices in
monopolistic competition
?
Because there are many good
substitutes
available
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What type of demand curves do firms in
monopolistic competition
face?
Price elastic
demand curves
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What is a characteristic of
barriers to entry
in
monopolistic competition
?
There are low barriers to entry and
exit
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What type of competition is prevalent in
monopolistic competition
?
Non-price competition
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What is an example of a
monopolistically competitive
market?
Clothing markets
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How do firms behave in the
short run
in
monopolistic competition
?
They behave similarly to
monopolies
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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
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What happens to
supernormal profits
in the long run in
monopolistic competition
?
They are
eroded
as new firms enter the market
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What causes the demand curve for
individual firms
to shift in the long run?
New firms
entering the market
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What is the
long-run equilibrium
condition for firms in
monopolistic competition
?
Average revenue
equals
average cost
, resulting in
normal profit
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What is the implication of price being greater than
marginal cost
in monopolistic competition?
Allocative efficiency
is not achieved
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What does
productive efficiency
refer to in monopolistic competition?
Producing at the minimum point of the
average cost curve
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What is
dynamic efficiency
in the context of
monopolistic competition
?
The ability to reinvest
profits
into the company for innovation
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How does
monopolistic competition
compare to
perfect competition
in terms of
efficiency
?
Monopolistic competition is less efficient than perfect competition
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What is a potential benefit of
product differentiation
in
monopolistic competition
?
Consumers
may prefer variety over homogeneity
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What might lead to dynamic efficiency in monopolistic competition?
Short-run supernormal profits can be reinvested
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How does the desire for variety affect economies of scale in monopolistic competition?
It makes it harder to exploit economies of scale
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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
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What is the significance of good substitutes in monopolistic competition?
They limit the extent of price exploitation by firms
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How does the presence of many
firms
affect pricing in
monopolistic competition
?
It prevents firms from raising prices
significantly
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What is the role of advertising in
monopolistic competition
?
It is a form of
non-price competition
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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
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What is the impact of
consumer preferences
on
monopolistic competition
?
They drive firms to
differentiate
their products
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How does the theory of
monopolistic competition
evaluate the
market structure
?
It suggests that monopolistic competition is
inefficient
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What is the significance of the downward sloping revenue curves in
monopolistic competition
?
They indicate that firms can set prices above
marginal cost
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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
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What is the effect of competition on the pricing power of firms in monopolistic competition?
It reduces the pricing power of firms
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How does the entry of new firms affect existing firms in monopolistic competition?
It decreases demand for existing firms' products
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What is the implication of firms being profit maximizers in monopolistic competition?
They produce where
marginal cost
equals
marginal revenue
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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
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How does the concept of consumer surplus relate to monopolistic competition?
Consumer surplus may be reduced due to higher prices
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What is the role of
market information
in
monopolistic competition
?
It allows firms to make informed decisions about
entry
and
pricing
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How does the presence of many firms influence the
market dynamics
in
monopolistic competition
?
It creates a competitive
environment
that limits price increases
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What is the significance of the
downward sloping demand curve
in
monopolistic competition
?
It indicates that firms can influence prices through their
output decisions
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How does the concept of
economies of scale
apply to
monopolistic competition
?
Firms may not fully exploit economies of scale due to
product differentiation
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What is the impact of
product differentiation
on pricing in
monopolistic competition
?
It allows firms to charge higher prices than in
perfect competition
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