Monopolistic Competition

• What is monopolistic competition?

  A form of imperfect competition
• Where can monopolistic competition be found?

  In many real-world markets
• What is the most common market structure in real life?

  Monopolistic competition
• What are the assumptions of monopolistic competition?

  1. Many producers and consumers exist
  2. Non-price differences among products
  3. Producers are price makers
  4. Low barriers to entry and exit
  5. Firms are profit maximizers
• What does a low concentration ratio indicate in monopolistic competition?

  Many producers and consumers
• What is product differentiation in monopolistic competition?

  Perceived non-price differences among products
• How do producers in monopolistic competition control prices?

  They are price makers, not price takers
• How elastic is the demand curve in monopolistic competition?

  More elastic than monopoly, less than perfect competition
• What is the nature of barriers to entry in monopolistic competition?

  They are low
• What do monopolistic firms aim to achieve?

  Profit maximization
• What characterizes the demand curve faced by monopolistically competitive firms?

  • Relatively elastic demand
  • Wide range of output at narrow prices
  • Close but not perfect substitutes
  • Strong brand loyalty affects sensitivity to price
• How does demand in monopolistic competition differ from perfect competition?

  Demand is not perfectly elastic
• What happens to profits in the short run for monopolistically competitive firms?

  They can be at any level
• What effect do high levels of supernormal profit have in monopolistic competition?

  Attract new suppliers and products
• What happens to the demand curve in the long run for monopolistically competitive firms?

  It shifts to the left
• What is a characteristic of the long-run equilibrium in monopolistic competition?

  Adjacent to the left of the ATC curve's low point
• What are the implications of monopolistic competition?

  • Inefficient outcomes (productively and allocatively)
  • Easy entry eliminates economic profits in the long run
  • Product differentiation can lead to supernormal profits
  • Heavy marketing spending may be inefficient
• What does allocative efficiency mean?

  Producing goods relative to consumer preferences
• What does productive efficiency mean?

  Producing at the minimum of the average cost curve
• How does product life cycle affect monopolistic competition?

  It affects volume and growth of sales
• What is a criticism of marketing in monopolistic competition?

  It is often seen as an inefficient use of resources
• How is the environmental impact of packaging related to monopolistic competition?

  It raises concerns about resource use