Monopolistic competition

• What type of competition characterizes a monopolistically competitive market?

  Imperfect competition
• How do firms in a monopolistically competitive market maximize profits in the short run?

  By being short run profit maximizers
• What type of products do firms sell in a monopolistically competitive market?

  Non-homogeneous products due to branding
• Why is the cross elasticity of demand (XED) high in monopolistically competitive markets?

  Due to the presence of close substitutes
• What is a key assumption of the monopolistically competitive market model regarding buyers and sellers?

  There are a large number of buyers and sellers
• How does market power compare among sellers in a monopolistically competitive market?

  Each seller has the same degree of market power
• What type of competition do firms in a monopolistically competitive market primarily engage in?

  Non-price competition
• What is the barrier to entry in a monopolistically competitive market?

  Low barriers to entry and exit
• What does the downward sloping demand curve indicate for firms in a monopolistically competitive market?

  They can raise prices without losing all customers
• What type of information do buyers and sellers have in a monopolistically competitive market?

  Imperfect information
• At what point do firms profit maximize in the short run?

  At the point MC = MR
• What does the area P1C1AB represent in the context of monopolistically competitive markets?

  Supernormal profits earned in the short run
• What happens to the market when new firms enter in the long run?

  Demand for existing firms' products becomes more elastic
• What is the long run equilibrium point in a monopolistically competitive market?

  P1Q1
• How can firms maintain their position in the short run?

  By differentiating their products and innovating
• What are the advantages and disadvantages of monopolistically competitive markets?

  Advantages:

  • Wide variety of consumer choice
  • More realistic model than perfect competition
  • Short run supernormal profits may increase dynamic efficiency

  
  

  Disadvantages:

  • Allocatively inefficient (P > MC)
  • Limited dynamic efficiency in the long run
  • Excess capacity and productive inefficiency
  • X-inefficiency due to lack of cost minimization
• What does allocative inefficiency mean in the context of monopolistically competitive markets?

  P is greater than MC
• Why might dynamic efficiency be limited in the long run for firms in monopolistically competitive markets?

  Due to the lack of supernormal profits
• What does excess capacity indicate about firms in monopolistically competitive markets?

  Firms do not fully exploit their factors
• How does x-inefficiency affect firms in monopolistically competitive markets?

  Firms have little incentive to minimize costs