Monopolistic Competition Overview

These flashcards cover key concepts related to monopolistic competition, including its characteristics, differences with other market structures, and long-run implications for firms.

What characterizes monopolistic competition regarding the number of firms in the industry?

There is a fairly large number of small or medium-sized firms in the industry.

What are the barriers to entry in monopolistic competition?

There are no barriers to entry.

How do firms in monopolistic competition differentiate themselves?

Firms try to differentiate their products, giving them some control over pricing.

What is the demand curve shape in monopolistic competition compared to monopoly and perfect competition?

It is more elastic (flatter) than a monopoly's demand curve and steeper than perfect competition's.

What happens to consumers if a firm in monopolistic competition raises its price?

The firm will lose more consumers than a monopoly would but less than a perfectly competitive firm due to product differentiation.

What is price competition in the context of monopolistic competition?

Price competition refers to firms changing prices to gain a competitive advantage or attract customers from competitors.

What is non-price competition?

Non-price competition includes methods other than price, like product differentiation, advertising, and branding.

What happens when a firm in monopolistic competition makes abnormal profits in the short run?

New firms enter the industry, leading to a decrease in demand for existing firms until normal profits are achieved.

What is the condition for allocative efficiency in monopolistic competition, and is it typically met?

Allocative efficiency requires P=MC, which is not met in monopolistic competition (P>MC).

Why is some inefficiency in monopolistic competition justified?

Inefficiency is often justified due to product differentiation, which consumers tend to enjoy.

What are the similarities between monopolistic competition and perfect competition?

Both have large numbers of firms, no barriers to entry, and normal profit in the long run.

What distinguishes monopolistic competition's demand curve from that of monopoly?

Monopolistic competition has a downward sloping demand curve unlike the perfectly elastic demand curve of perfect competition.

How does product variety in monopolistic competition compare to monopoly?

Monopolistic competition offers more product variety than monopoly.

What is the long-run outcome for firms in monopolistic competition?

Long-run equilibrium results in normal profits where P=AC.

What is the impact of competitive pressure on firms in monopolistic competition?

It forces inefficient firms to exit the market, keeping costs low.

How do barriers to entry differ between monopolistic competition and monopoly?

Monopolistic competition has no barriers to entry, while a monopoly has high barriers to entry.

What potential impacts does research and development (R&D) have in monopolistic competition?

Competition may encourage firms to invest in R&D for product differentiation.