Chapter 17: Monopolistic Competition – Key Vocabulary

These vocabulary flashcards cover the main terms, concepts, and relationships discussed in Chapter 17 on monopolistic competition, including market structures, firm behavior, long-run equilibrium, welfare implications, advertising, and brand names. They are designed to aid exam review by clarifying definitions and highlighting contrasts among perfect competition, monopoly, and monopolistic competition.

Monopolistic Competition

A market structure with many sellers offering similar but differentiated products and free entry and exit.

Imperfect Competition

Any market structure that is neither perfectly competitive nor a pure monopoly; includes monopolistic competition and oligopoly.

Oligopoly

A market with only a few sellers, each offering a product similar or identical to the others.

Concentration Ratio

The percentage of total market output produced by the four largest firms; used to gauge the degree of oligopoly.

Product Differentiation

Strategy whereby firms make their products distinct through quality, features, branding, or advertising.

Downward-Sloping Demand Curve

The demand curve faced by a monopolistic competitor because its product is differentiated and it is a price maker.

Free Entry and Exit

Condition in which firms can join or leave the market without barriers, driving long-run economic profit to zero.

Market Power

The ability of a firm to set price above marginal cost; present in monopoly and monopolistic competition.

Marginal Revenue = Marginal Cost (MR = MC)

Profit-maximizing rule used by firms in monopoly, monopolistic competition, and perfect competition.

Short-Run Economic Profit

Positive profit earned when price exceeds average total cost before entry erodes it in the long run.

Long-Run Zero Profit

Outcome in monopolistic competition where entry and exit shift demand until price equals average total cost.

Excess Capacity

Producing below the quantity that minimizes average total cost; characteristic of long-run monopolistic competition.

Efficient Scale

The output level that minimizes average total cost; reached under perfect competition but not under monopolistic competition.

Markup

The difference between price and marginal cost; exists in monopolistic competition because firms have some market power.

Deadweight Loss

Loss of total surplus caused by price being set above marginal cost, deterring mutually beneficial trades.

Product-Variety Externality

Positive externality to consumers from the introduction of a new differentiated product, increasing consumer surplus.

Business-Stealing Externality

Negative externality imposed on existing firms when a new entrant captures some of their customers and profits.

Advertising

Expenditure by firms to inform or persuade consumers, common in markets with differentiated products and P > MC.

Critique of Advertising

View that ads manipulate tastes, foster irrational brand loyalty, and make demand less elastic, raising prices.

Defense of Advertising

Argument that ads provide information, increase demand elasticity, facilitate entry, and intensify competition.

Advertising as a Signal

Theory that high ad spending signals product quality because only high-quality firms can profitably bear the cost.

Brand Name

A widely recognized trademark that can convey consistent quality and create consumer loyalty.

Generic Product

A non-branded good that typically sells at a lower price and relies less on advertising to attract buyers.

Elasticity of Demand and Ads

Advertising can decrease elasticity (if it strengthens loyalty) or increase elasticity (if it informs about substitutes).

Monopoly

Market structure with a single seller and no close substitutes, allowing sustained long-run profits.

Perfect Competition

Market with many sellers of identical products, price taking, and zero long-run profits.

Imperfect-Competition Externalities

Combined positive (product variety) and negative (business stealing) spillovers that can make entry socially excessive or insufficient.

Marginal Cost (MC)

The additional cost of producing one more unit of output.

Average Total Cost (ATC)

Total cost divided by quantity; intersects demand at zero-profit equilibrium in monopolistic competition.

Price Maker

A firm that faces a downward-sloping demand curve and can influence the market price of its product.