Monopolistic Competition Flashcards ch 12

These flashcards encompass key terms and concepts related to monopolistic competition.

Monopolistic Competition

A market structure characterized by many firms, differentiated products, some control over price, and relatively easy entry and exit.

Product Differentiation

The process by which firms make their products different from those of competitors, influencing consumer preferences.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in price.

Economic Profit

The profit that remains after the opportunity costs of all inputs have been subtracted; occurs when total revenue exceeds total cost.

Left Shift of Demand Curve

A decrease in demand for a product, often occurring when consumers switch to substitute products.

Price Maker

A firm that has some control over the price it charges due to product differentiation.

Allocative Efficiency

A market condition where the price of the good reflects the marginal cost of producing it, resulting in optimal distribution of resources.

Productive Efficiency

A situation where a firm's output is produced at the lowest possible cost, typically where price equals minimum average total cost.

Herfindahl Index

A measure of market concentration calculated by summing the squared market shares of all firms in the industry.

Concentration Ratio

A measure used to assess the distribution of market shares among the largest firms in a market, indicating the level of competition.

Nonprice Competition

Strategies to attract customers through means other than lower prices, such as advertising and quality improvements.

Excess Capacity

A situation where a firm produces at a level less than the output at which average total costs are minimized.

Downward-Sloping Demand Curve

A demand curve that slopes downwards, indicating that as the price decreases, the quantity demanded increases.

Zero Economic Profit

A situation in which total revenue is equal to total costs, indicating no economic profit is being made; common in long-run equilibrium.

Deadweight Loss

The loss of economic efficiency that occurs when the equilibrium outcome is not achievable or not achieved in a market.

A monopolistically competitive firm gets a massive amount of free advertising when a government agency gives it an award and millions of people mention the award to each other on social media. Which of the following is most likely to happen?

Answer: Demand becomes less elastic and pricing power increases.

There are 10 firms in an industry, and each firm has a market share of 10 percent. What is the industry’s Herfindahl index?

Answer: 1,000.

In the small town of Geneva, there are 5 firms that make watches. The firms’ respective output levels are 30 watches per year, 20 watches per year, 20 watches per year, 20 watches per year, and 10 watches per year. What is the four-firm concentration ratio for the town’s watch-making industry?

Answer: 90.

Which of the following best describes the efficiency of monopolistically competitive firms?

Answer: D. Neither allocatively efficient nor productively efficient.

Competitive Market

In a competitive market, there are many buyers and sellers, which leads to standardized products and no control over prices

Homogeneous Products

Sellers offer similar products, leading to a perfectly elastic demand curve

Accounting Profit

This is calculated as total revenue minus explicit costs, which may differ from economic profit

Economic Profit

This is the difference between total revenue and total costs, including both explicit and implicit costs.

Condition

Profit is maximized when total revenue exceeds total cost. The formula for profit is total revenue minus total cost

Break-Even Point

This occurs when total revenue equals total cost, resulting in zero profit