Monopolistic Competition Flashcards

These flashcards cover key concepts related to market structures and the mechanisms of profit maximization in monopolistic competition, highlighting differences among various market types.

What are the characteristics of perfect competition?

Many sellers and buyers, homogeneous products, price takers, free entry and exit.

What defines a monopoly?

One seller, no close substitutes, price maker with market power, barriers to entry.

What is an oligopoly?

A market structure with few sellers offering similar or identical products.

What is monopolistic competition?

Many sellers, differentiated products, and free entry and exit.

What is product differentiation?

The process by which firms differentiate their products to appeal to consumers, influenced by consumer tastes.

Give an example of product differentiation.

Levi's vs. Wrangler jeans, or Coke vs. Pepsi.

Describe the demand curve in monopolistic competition.

It is downward sloping due to product differentiation.

How do firms in monopolistic competition maximize profit in the short run?

By producing where marginal revenue equals marginal cost (MR=MC).

What happens in the long run to firms in monopolistic competition?

Economic profits attract new firms, shifting the demand curve left until economic profits are zero.

In long run equilibrium for monopolistic competition, how is price related to average total cost?

P=ATC and MR=MC.

In monopolistic competition, how is price compared to marginal cost?

Price exceeds marginal cost (P > MC), similar to a monopoly.

What happens to the demand curve in the long run for firms in monopolistic competition?

The demand curve shifts down until it touches the average total cost curve.