Economics - Monopolistic Competition

Flashcards covering key concepts of monopolistic competition, product differentiation, and industry models in economics.

Monopolistic Competition

Many competing producers (firms) in the industry, each producer sells a differentiated product, and there is free entry into and exit from the industry in the long run.

Monopolistic Competition Characteristics

Has many competitors, products similar but not identical, and free entry into and exit from the industry in the long run.

Forms of Product Differentiation

Differentiation by style or type (e.g., sedans versus SUVs), differentiation by location (e.g., dry cleaner near home versus cheaper dry cleaner far away), and differentiation by quality (e.g., ordinary chocolate versus gourmet chocolate).

Important features of industries with differentiated products

Competition among sellers and value in diversity.

Monopolistic Competition in the Short Run

Produce the Q at which MR = MC, like monopoly firms, set price according to demand.

New firms entering the industry (positive profits)

Reduce the demand curve facing each individual producer.

Long-Run Zero-Profit Equilibrium

Each supplier will earn a zero profit, and price will equal ATC.

Characteristics of perfect competition and monopolistic competition

Free entry and exit, many competing producers in the industry, production occurs at minimum ATC in the long run, and zero profit in the long run.

Cause for monopolistically competitive firms to earn zero profit in the long run

Free entry and exit.

Number of Firms in Perfect Competition

Many firms

Number of Firms in Oligopolistic Competition

Many firms

Number of Firms in Monopoly

One firm

Product Type in Perfect Competition

Same for all firms

Product Type in Oligopolistic Competition

Differentiated for all firms

Product Type in Monopoly

One product

Entry/Exit in Perfect Competition

Free in long run

Entry/Exit in Oligopolistic Competition

Free in long run

Entry/Exit in Monopoly

None

Long Term Profits in Perfect Competition

No

Long Term Profits in Oligopolistic Competition

No

Long Term Profits in Monopoly

Yes

Long Term Price in Perfect Competition

P = minLATC

Long Term Price in Oligopolistic Competition

P = LATC

Long Term Price in Monopoly

P > LATC

Long Term Output in Perfect Competition

Largest

Long Term Output in Oligopolistic Competition

Less than perfect competition

Long Term Output in Monopoly

Smallest

Control over Price in Perfect Competition

None

Control over Price in Oligopolistic Competition

Some, subject to competition

Control over Price in Monopoly

Complete