Monopolistic Competition

Flashcards that cover key concepts of monopolistic competition in microeconomics.

What defines monopolistic competition?

A market structure with many firms competing by selling similar but not identical products.

What are the characteristics of monopolistic competition?

Many sellers, product differentiation, and free entry and exit.

What is the difference between perfect competition and monopolistic competition?

Perfect competition has identical products and a horizontal demand curve, while monopolistic competition has differentiated products and a downward-sloping demand curve.

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

They earn zero economic profits due to new firms entering the market.

What role does advertising play in monopolistic competition?

Advertising helps differentiate products and can increase demand, allowing firms to charge higher prices.

What is the price effect and quantity effect?

The price effect is the loss in revenue from lowering the price, while the quantity effect is the gain in revenue from selling additional units.

Why might consumers accept higher prices in monopolistic competition?

Consumers may prefer differentiated products that better suit their tastes and preferences.

What is the impact of elasticity on total revenue?

When demand is elastic, a price decrease will increase total revenue; if demand is inelastic, a price decrease will lower total revenue.

What is the relationship between price and marginal cost in monopolistic competition?

In monopolistic competition, price is greater than marginal cost (P > MC).

What happens when firms in monopolistic competition experience a short-run economic profit?

New firms will enter the market, decreasing demand for existing firms until profits reach zero.

What does the demand curve look like for a firm in monopolistic competition?

The demand curve is downward-sloping due to product differentiation.

What is brand management?

The actions of a firm intended to maintain the differentiation of a product over time.

How do perfect competition and monopolistic competition differ regarding efficiency?

Perfectly competitive firms achieve productive and allocative efficiency, while monopolistically competitive firms do not.

What are the two ends of the market structure spectrum?

Perfect competition and monopoly.

What can firms do to avoid zero economic profit in the long run?

They can innovate to lower costs or improve product perception through branding and advertising.

What is the significance of the market power held by firms in monopolistic competition?

Firms set prices higher than marginal costs, resulting in less than socially efficient production.

What factors determine a firm's profitability?

The ability to differentiate its product, the average cost of production, and external economic factors.