1.5.4 Monopolistic Competition

Monopolistic Competition

A market structure characterized by a large number of firms selling differentiated products, allowing for some degree of monopoly power.

Differentiated Products

Products that are distinct in some way from others in the market, allowing firms to have some price-making power.

Price-Making Power

The ability of a firm to influence the price of its product due to differentiation.

Short Run Equilibrium

The point where a firm maximizes profit by producing where marginal cost equals marginal revenue (MC = MR).

Long Run Equilibrium

A situation where supernormal profits attract new firms to the market, eventually leading to only normal profits as demand adjusts.

Non-Price Competition

Strategies used by firms to compete based on factors other than price, such as advertising and product differentiation.

Allocative Inefficiency

A situation where firms set prices above marginal cost (P > MC), leading to a loss of economic welfare.

Productive Inefficiency

Occurs when firms do not operate at the lowest point on their average cost curve.

Dynamic Efficiency

Efficiency achieved through continuous innovation and product development in response to competition.

Market Entry Barriers

Obstacles that make it difficult for new firms to enter a market, which are typically low in monopolistically competitive markets.

Brand Loyalty

The tendency of consumers to continue buying the same brand over time, often established through advertising.

Supernormal Profits

Profits that exceed the normal expected return, often present in the short run of monopolistic competition.

Price Elasticity of Demand

A measure of how sensitive the quantity demanded is to a change in price, affected by the availability of substitutes.