Monopolistic Competition: The Competitive Model in a More Realistic Setting

These flashcards cover key concepts from the lecture on monopolistic competition, highlighting characteristics, profit maximization, efficiency concepts, and the impact of marketing.

What is monopolistic competition?

A market structure where many firms compete by selling similar, but differentiated products, with low barriers to entry.

What are the characteristics of monopolistic competition?

1. Many firms 2. Firms sell differentiated products 3. No barriers to entry to new firms.

How does a firm in a monopolistically competitive market maximize profit in the short run?

A firm maximizes profit by producing until marginal cost equals marginal revenue (MC = MR).

What happens to profits in the long run for a monopolistically competitive firm?

In the long run, profits can be eliminated due to the entry of new firms, leading to zero economic profit.

What defines productive efficiency?

Producing items at the lowest possible cost.

What defines allocative efficiency?

Producing all goods up to the point where the marginal benefit to consumers equals the marginal cost to firms.

What role does advertising play in monopolistic competition?

Advertising helps to differentiate products, increases demand, and can make the demand curve more inelastic.

What is product differentiation?

The process of distinguishing a product from others to make it more attractive to a target market.

Which factors affect a firm's profitability?

Factors under a firm's control include its ability to differentiate products and produce at lower costs; external factors affect all firms in the market.

What is brand management?

The actions taken by a firm to maintain product differentiation over time.

How do entry of new firms affect existing firms in monopolistic competition?

The entry of new firms reduces the demand for existing firms' products, potentially eliminating their economic profits.