Chapter 12: Monopolistic Competition Flashcards
What are the characteristics Monopolistic Comepetition?
-Relatively large number of sellers (not as big as in perfect competition)
-Product differentiation
-Easy entry and exit (not as easy as in perfect competition)
-Nonprice competition like advertising, reduces competition and gives firms greater pricing power.
What is Product differentiation?
In monopolistic competition, firms can differentiate their products by the product attributes, by service, with location, or with brand names and packaging. There is relatively easy entry and exit, just not as easy as with perfect competition.
What is Market/Industry Concentration?
It is the measure of how well the distribution of a given market is among the participating companies is.
How is Industry Concentration measured in a Monopolisitcally Competitive Industry?
Measured by 4-firm concentration ratio (CR): Percentage of sales by 4 largest firms
4-firm Concentration Ration (CR) =
Output of Four Largest Firms ÷ Total Output in the Industry
What is the Herfindahl index (HI):
Sum of squared market shares.
What does the Herfindahl index (HI) measure?
It is another way to find a market concentration
What is the equation for what does the Herfindahl index (HI)
HI = (%S1)2 + (%S2)2 + (%S3)2 + …. + (%Sn)2
What does a higher index (close to 10,000) mean for the Herfindahl Index (HI)?
Less competition meaning Highly Concentrated
What does a lower index (below 1,500) mean for the Herfindahl Index (HI)?
More competition meaning low concentration.
If an index is between 2,500-1,500, what level of concentration exists in the Herfindahl Index (HI)?
Moderately Concentrated
Moderately Squared
Highly Concentrated means what?
One or a few companies dominate the majority of a market meaning their market share is very high.
Lower Concentration means what?
An industry has a large number of smaller companies, all containing small percentages of the overall market share.
True or False? The firm’s demand curve in a monoplistic competition is highly, but not perfectly, elastic.
true
True or False? the demand curve in a monopolistic competition is less elastic than in pure competition?
True because the seller’s product is differentiated from its rivals, so the firm has some control over price.
True or False: In the short-run situation, a monopolistic competition firm will maximize profits or minimize losses by producing where marginal cost and marginal revenue are equal (MR=MC), as was true in pure competition and monopoly.
true
is it possible to make profits or inccur loess in Short-Run for the Monopolistically Competitive Firm?
Yes
what is the formula for Econmic Profit in the short run for a Monopolistically Competitive Firm?
(Price - ATC) * Q where Q is profit maximizing output value
when do we know a Monopolistically Competitive Firm is incurring losses in the Short Run when?
when Price (P) is less than Average Total Cost (ATC).
A Monopolistically Competitive Firm in the Long Run will continue to produce when…
MR=MC
In the Long Run a Monopolistically Competitive Firm will enter the industry if…
economic profits were enjoyed, shifting demand left and causing profits to fall.
In the Long Run a Monopolistically Competitive Firm will exit the industry if…
if there are economic losses, shifting demand to the right and causing losses to shrink. This will continue until the price settles where it equals ATC at the MR = MC output. At this price, the monopolistically competitive firm earns a normal profit, and long run equilibrium is established.
When is equilibrium is established in the Long Run for a monopolistically competitive firm?
When price settles where it equals ATC at the MR = MC output. At this price, the monopolistically competitive firm earns a normal profit, and long run equilibrium is established.
When is Monopolistic Competitive firm at a productive
inefficiency?
P > min ATC is condition for productive inefficiency.
What is P > MC a condition for?
allocative inefficiency.
Productive efficiency means that the firm is…
producing in the least costly way and is found when P = minimum ATC.
Allocative efficiency means that the firm is …
producing the right amount of product and is found when P = MC.
When there is excess capacity in the industry, which means…
that the plant and equipment are underutilized because firms are producing below minimum ATC output.
In long-run equilibrium, a monopolistic competitor achieves neither…
productive nor allocative efficiency
Why is Productive Efficiency not realized in Monopolistic Competiton?
because production occurs where the average total cost (A3) exceeds the minimum average total cost (A4).
Why is Allocative Efficiency is not achieved?
because the product price (P3) exceeds the marginal cost
What does it mean when Product and Allocative effects are not realized?
There is an under allocation of resources as well as an efficiency loss and excess production capacity for every firm in the industry.
In Monopolistic Competition Product Variety means…
The firm constantly manages price, product, and advertising:
Better product differentiation
Better advertising
Higher minimum wage favors big hamburger chains because…
Big chain restaurants are capital intensive, so an increase in the minimum wage doesn’t affect them much.
An increase in the minimum wage for Mom-and-Pop restaurants can do what?
Can put them out of business Mom-and-pop restaurants are labor intensive, so an
