Monopolistic Competition and Market Structures

Flashcards based on key concepts from the lecture on monopolistic competition and market structures.

Monopolistic Competition

A market structure where many firms sell products that are similar but not identical.

Characteristics of Monopolistic Competition

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

Profit-Maximizing Condition

In the short run, monopolistically competitive firms maximize profit by producing where marginal revenue equals marginal cost (MR = MC).

Demand Curve Comparison

Monopolistically competitive firms experience different demand and marginal revenue curves in the short run compared to the long run.

Concentration Ratio

Percentage of total output in the market supplied by the four largest firms.

Price Compared to Marginal Cost in Monopolistic Competition

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

Long-Run Equilibrium in Monopolistic Competition

Occurs when firms make zero economic profit; demand curve is tangent to average total cost curve.

Economic Profits in the Long Run

In the long run, firms cannot earn economic profits in a monopolistically competitive market due to free entry and exit.

Advertising Incentive

Firms have an incentive to advertise to attract more buyers when selling differentiated products.

Critique of Advertising

Advertising manipulates consumer tastes and impedes competition by reducing price elasticity of demand.

Defense of Advertising

Advertising provides information, enhances competition, and allows new firms to enter the market more easily.