ECOn exam 2: Chapter 15

What is a monopolistic competition?

A market with many firms selling similar but differentiated products with no barriers to entry or exit.

What is product differentiation?

Making products different from competitors products. They are imperfect substitutes, giving consumers variety and choice

Why is a monopolistically competitive firm’s demand curve downward sloping but relatively flat?

Downward sloping: The firm controls its unique variety

Relatively flat: Many close substitutes exist

What happens to monopolistically competitive firms in the short run?

Firms can earn positive economic profits because their products are differentiated

What happens in the long run under monopolistic competition?

New firms enter, reducing existing firms demand until economic profits reach zero. Firms can operate below efficient scale.

How does monopolistic competition compare to perfect competition?

Both have many firms and zero long-run economic profit. But monopolistic competition has differentiated products, P > MR, and inefficient output

What is an oligopoly?

A market with a few firms selling similar goods or services that behave strategically and depend on each others decisions

What is interdependency in an oligopoly?

One firm’s profit depend on its own decisions AND the decisions of its competitors

What is the difference between collusion and competition in an oligopoly?

Collusion: Firms cooperate to maximize joint profits, like a monopoly

Competition: Firms act independently to gain market share

How do the quantity effect and price effect influence oligopoly decisions?

Quantity effect: Selling more units increases profit if P > MC

Price effect: More output lowers market price, reducing profit per unit